I first heard of Eurodollars in a book by "Adam Smith" (George J. W. Goodman) called "Paper Money" which came out in 1981. I was wondering if you had heard this story about its origins. I haven't seen it anywhere else. The relevant portion is below (all typos are my own):
The Eurodollar was invented by the Russians.
Like everyone else in the mid-1950s, the Russians used the dollar in their international transactions. It was the key currency; no one wanted rubles. If you earned dollars, you could take those dollars to the United States and get oil, aircraft, wheat, soybeans, automobiles; you could also get, if you wanted it, gold. You could leave the dollars in a New York bank and get interest. Like everyone else, the Russians had some dollars in New York.
After the Hungarian revolt in 1956, a Russian bureaucrat moved his country's dollar balances to the Moscow Narodny Bank in London, a bank with a British charter owned by the Soviet Union. He probably thought that if the cold war got worse, the Americans might freeze those dollars in New York, so he had better keep them in Europe, beyond the reach of politics. I once pursued this faceless bureaucrat who deserves a footnote in history. The pursuit looked promising when a Russian banker said, "Dregasovitch didn't invent the Eurodollar, the people under him did; he just took all the credit," but the trail grew cold after that. The Eurodollar's inventor has disappeared into the complex world of Russian banking...
Pressed for details, the Moscow Narodny Bank replies with very dry tracts on "the development of socialist banks." It no longer matters. On February 28, 1957, the Moscow Narodny Bank in London put out to loan, through a London merchant bank, the sum of $800,000. This minuscule amount was borrowed and repaid outside the U.S. banking system. The Soviets also owned a bank in Paris called the Banque Commercial pour l'Europe du Nord, whose Telex address was "Eurbank." The Paris Russian bank took some Narodny dollars and lent them; the dollars were known as Eurbank dollars, and finally Eurodollars.
At that point we can retire the Russians from the history of the Eurodollar; the capitalist bankers all loved the idea. The charm of Eurodollars, to bankers, was that they didn't belong anywhere and owed no allegiance to anyone; therefore, nobody regulated them. They were beyond the reach of the Federal Reserve, the Bank of England, the Bundesbank, and all the other government authorities. The Federal Reserve can require banks to put up a portion of their deposits as reserves; other agencies govern the character and size of loans. But not in Eurodollars; these dollars could be deposited, lent, and repaid, all while the Federal Reserve looked on from afar...
So the regulation of the banks varied from country to country. But the *currency*, once escaped, was gone: there was no way to whistle it home. If threatened with regulation, the Eurodollars would flutter up like a frightened flock of warblers and alight in some other country.
Beyond the wonderful country of Euroland was a still more wonderful country called Offshore. In Euroland the dollars were lent and deposited beyond the reach of the monetary authorities. For the dollars that belonged nowhere, there were now countries with hundreds of banks whose banking systems did not exist, like the Bahamas, the Netherlands Antilles, and the Cayman Islands. The borders of the two countries, Euroland and Offshore, were very fuzzy and overlapping, and in any case the two countries existed by their nonexistence in the filing cabinets of big law firms in New York and London. The Netherlands Antilles would get to sell a charter, and some annual stamps, so it was happy; and the bank was happy because it was in the Big Rock Candy Mountain of banking, where bankers are free as the breeze. The banks might be small or they might have recognizable names...all chartered offshore and doing business in Euroland.
The currency for Euroland came from the balance-of-payments deficit, that is, from more dollars going out than coming in. If the extra dollars for Volkswagens had all come back to New York to be lent or invested, there would have been no Eurodollar. But some of those dollars, sent out, never came back; they arrived in Euroland with Caribbean tans.
This phenomenon began with the $800,000 loaned by the Moscow Narodny Bank in London, and now there are somewhere around three-quarters of a *trillion* dollars of this very fecund currency, and there are also Euromarks and Euroyen and Eurofrancs, all looking rested and tanned and showing no desire to go home.
The problem with those Eurodollars is that they *could* come home; they did not have to stay contained in their own wonderful world. What if there were too many of them?
Thank you for this very interesting article, I am writing a policy memo for one of my classes regarding whether the US should be taking action against the de-dollarization movement led by BRICS countries. Found this piece very helpful.
Exclusive: Shell seeks Iran sanctions workaround via Cargill grain barter. October 2012. As far as I know, every transaction in USD gets routed through a US correspondent bank. Treasury knows perfectly well who is using those "eurodollars" and for what. Use them for something the USG doesn't like, and you're going to hear about it. That is the problem(?) with the USD as a global reserve currency. It has become a policy tool, and not purely a medium of exchange. Cargill, a private company made up of very, very tough people, and Shell, a public company of very very tough people, initially reacted to US sanctions on Iran in 2012 with disdain. If I remember correctly, the quote from one of their traders in London was "Who the fuck are they (USG) to tell us who we can trade with?." It wasn't very long (a week?) after that the big grain traders suspended trade with Iran. The use of the dollar as a policy tool is what is driving any de dollarization that is happening, not our deficits or printing or anything else.
Thanks! I agree with your last line, and overall policy tool point. I disagree however with the “Treasury knows where Euro$ are” point. Many of these banks are unregulated by the Fed, are often shadow banks, and use a variety of financial innovation to makes derivatives “money-like” in order to get transactions done.
Even Greenspan in the early 2000s talked about how it was impossible to track the money supply because of all the types of money out there -- and he def wasn’t talking about people in prison using cigarettes!
Fascinating analysis. I never quite got the eurodollar creation process — the example of Japanese banks printing US$ with aid of non-US regulated US banks (not US regulated as they are located in Japan) who can create dollars is helpful. I’ve worked at large banks on and off for many years and I am constantly surprised at how little even insiders understand the systems they work with so it’s very believable that the eurodollar system developed organically and outside of the control of the Fed who has become handmaiden to a process it does not fully understand or control.
Hell, the Fed doesn't even understand what inflation is -- only seeing wage and price inflation as such while asset inflation is never inflation but "wealth creation". Blinkered views that serve powerful interests layered on false understandings and ever-shifting realities.
And then we add the derivatives markets, CDS which most traders don't even understand how they work or are priced... in my 15+ years on and off working in tech at big banks it's always felt like a rube-goldberg of infinite complexity that could keel over at any moment. No wonder they keep pumping "liquidity" into "the" system: it's not a system in the way we think of a rationally ordered and mostly statically coupled set of processes -- its constantly 'managed" chaos. No wonder the central banks are pushing CBDC's -- they hope (pray?) it will give them a better ability to manage this leviathan or at least some kind of fallback system if the current mess goes critical.
Agree with all of that. Learning about money & the monetary system beyond the surface level narratives changes everything in terms of critique & solutions. Too many people trying to change the status quo, ranging from goldbugs & Bitcoiners to leftists, are basing their critique on a superficial understanding, not reality.
And yes, I kinda agree with what Richard Werner says (and maybe what Minsky said) about democratizing finance by having more regional/community banks that are focused on underwriting and backed by a public guarantee system.
Wow, thanks for sharing this was incredible. This spurs so many thoughts, some of which I mentioned in the piece that understanding the euro$ system changes the analytical frame sooo much.
But also, it’s wild how much of this system is emergent from a complex system and moments of crisis. It’s not planned, it wasn’t a formal transition. It just happened.
I first heard of Eurodollars in a book by "Adam Smith" (George J. W. Goodman) called "Paper Money" which came out in 1981. I was wondering if you had heard this story about its origins. I haven't seen it anywhere else. The relevant portion is below (all typos are my own):
The Eurodollar was invented by the Russians.
Like everyone else in the mid-1950s, the Russians used the dollar in their international transactions. It was the key currency; no one wanted rubles. If you earned dollars, you could take those dollars to the United States and get oil, aircraft, wheat, soybeans, automobiles; you could also get, if you wanted it, gold. You could leave the dollars in a New York bank and get interest. Like everyone else, the Russians had some dollars in New York.
After the Hungarian revolt in 1956, a Russian bureaucrat moved his country's dollar balances to the Moscow Narodny Bank in London, a bank with a British charter owned by the Soviet Union. He probably thought that if the cold war got worse, the Americans might freeze those dollars in New York, so he had better keep them in Europe, beyond the reach of politics. I once pursued this faceless bureaucrat who deserves a footnote in history. The pursuit looked promising when a Russian banker said, "Dregasovitch didn't invent the Eurodollar, the people under him did; he just took all the credit," but the trail grew cold after that. The Eurodollar's inventor has disappeared into the complex world of Russian banking...
Pressed for details, the Moscow Narodny Bank replies with very dry tracts on "the development of socialist banks." It no longer matters. On February 28, 1957, the Moscow Narodny Bank in London put out to loan, through a London merchant bank, the sum of $800,000. This minuscule amount was borrowed and repaid outside the U.S. banking system. The Soviets also owned a bank in Paris called the Banque Commercial pour l'Europe du Nord, whose Telex address was "Eurbank." The Paris Russian bank took some Narodny dollars and lent them; the dollars were known as Eurbank dollars, and finally Eurodollars.
At that point we can retire the Russians from the history of the Eurodollar; the capitalist bankers all loved the idea. The charm of Eurodollars, to bankers, was that they didn't belong anywhere and owed no allegiance to anyone; therefore, nobody regulated them. They were beyond the reach of the Federal Reserve, the Bank of England, the Bundesbank, and all the other government authorities. The Federal Reserve can require banks to put up a portion of their deposits as reserves; other agencies govern the character and size of loans. But not in Eurodollars; these dollars could be deposited, lent, and repaid, all while the Federal Reserve looked on from afar...
So the regulation of the banks varied from country to country. But the *currency*, once escaped, was gone: there was no way to whistle it home. If threatened with regulation, the Eurodollars would flutter up like a frightened flock of warblers and alight in some other country.
Beyond the wonderful country of Euroland was a still more wonderful country called Offshore. In Euroland the dollars were lent and deposited beyond the reach of the monetary authorities. For the dollars that belonged nowhere, there were now countries with hundreds of banks whose banking systems did not exist, like the Bahamas, the Netherlands Antilles, and the Cayman Islands. The borders of the two countries, Euroland and Offshore, were very fuzzy and overlapping, and in any case the two countries existed by their nonexistence in the filing cabinets of big law firms in New York and London. The Netherlands Antilles would get to sell a charter, and some annual stamps, so it was happy; and the bank was happy because it was in the Big Rock Candy Mountain of banking, where bankers are free as the breeze. The banks might be small or they might have recognizable names...all chartered offshore and doing business in Euroland.
The currency for Euroland came from the balance-of-payments deficit, that is, from more dollars going out than coming in. If the extra dollars for Volkswagens had all come back to New York to be lent or invested, there would have been no Eurodollar. But some of those dollars, sent out, never came back; they arrived in Euroland with Caribbean tans.
This phenomenon began with the $800,000 loaned by the Moscow Narodny Bank in London, and now there are somewhere around three-quarters of a *trillion* dollars of this very fecund currency, and there are also Euromarks and Euroyen and Eurofrancs, all looking rested and tanned and showing no desire to go home.
The problem with those Eurodollars is that they *could* come home; they did not have to stay contained in their own wonderful world. What if there were too many of them?
Adam Smith, "Paper Money", pp. 121-125
Thank you for this very interesting article, I am writing a policy memo for one of my classes regarding whether the US should be taking action against the de-dollarization movement led by BRICS countries. Found this piece very helpful.
Great to hear that, thanks!!
Exclusive: Shell seeks Iran sanctions workaround via Cargill grain barter. October 2012. As far as I know, every transaction in USD gets routed through a US correspondent bank. Treasury knows perfectly well who is using those "eurodollars" and for what. Use them for something the USG doesn't like, and you're going to hear about it. That is the problem(?) with the USD as a global reserve currency. It has become a policy tool, and not purely a medium of exchange. Cargill, a private company made up of very, very tough people, and Shell, a public company of very very tough people, initially reacted to US sanctions on Iran in 2012 with disdain. If I remember correctly, the quote from one of their traders in London was "Who the fuck are they (USG) to tell us who we can trade with?." It wasn't very long (a week?) after that the big grain traders suspended trade with Iran. The use of the dollar as a policy tool is what is driving any de dollarization that is happening, not our deficits or printing or anything else.
Thanks! I agree with your last line, and overall policy tool point. I disagree however with the “Treasury knows where Euro$ are” point. Many of these banks are unregulated by the Fed, are often shadow banks, and use a variety of financial innovation to makes derivatives “money-like” in order to get transactions done.
Even Greenspan in the early 2000s talked about how it was impossible to track the money supply because of all the types of money out there -- and he def wasn’t talking about people in prison using cigarettes!
Fascinating analysis. I never quite got the eurodollar creation process — the example of Japanese banks printing US$ with aid of non-US regulated US banks (not US regulated as they are located in Japan) who can create dollars is helpful. I’ve worked at large banks on and off for many years and I am constantly surprised at how little even insiders understand the systems they work with so it’s very believable that the eurodollar system developed organically and outside of the control of the Fed who has become handmaiden to a process it does not fully understand or control.
Hell, the Fed doesn't even understand what inflation is -- only seeing wage and price inflation as such while asset inflation is never inflation but "wealth creation". Blinkered views that serve powerful interests layered on false understandings and ever-shifting realities.
And then we add the derivatives markets, CDS which most traders don't even understand how they work or are priced... in my 15+ years on and off working in tech at big banks it's always felt like a rube-goldberg of infinite complexity that could keel over at any moment. No wonder they keep pumping "liquidity" into "the" system: it's not a system in the way we think of a rationally ordered and mostly statically coupled set of processes -- its constantly 'managed" chaos. No wonder the central banks are pushing CBDC's -- they hope (pray?) it will give them a better ability to manage this leviathan or at least some kind of fallback system if the current mess goes critical.
Agree with all of that. Learning about money & the monetary system beyond the surface level narratives changes everything in terms of critique & solutions. Too many people trying to change the status quo, ranging from goldbugs & Bitcoiners to leftists, are basing their critique on a superficial understanding, not reality.
And that's a problem.
Here I am, expecting to disagree. However, now I have gone through the 1 minute summary. I do not disagree at all.
I was expecting the petrodollar / USD rules the world argument.
Overall, I might not have framed and phrased it that way but I do broadly agree.
I suggest the leaning in both our cases is to democratise the currency.
How would you have framed it?
And yes, I kinda agree with what Richard Werner says (and maybe what Minsky said) about democratizing finance by having more regional/community banks that are focused on underwriting and backed by a public guarantee system.
And state banks like North Dakota's that finance local development without the rentier element -- with development as the goal, not direct profit.
Wow, thanks for sharing this was incredible. This spurs so many thoughts, some of which I mentioned in the piece that understanding the euro$ system changes the analytical frame sooo much.
But also, it’s wild how much of this system is emergent from a complex system and moments of crisis. It’s not planned, it wasn’t a formal transition. It just happened.
I believe that is true for all systems actually.