The Hidden History of Eurodollars, Part 1: Cold War Origins

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Joe Weisenthal (0:14)

Where's this going, Tracy?

Tracy Alloway (0:16)

I'm setting the scene.

Joe Weisenthal (0:18)

What was that? All right, let's just start. I'm Joe Weisenthal.

Tracy Alloway (0:22)

And I'm Tracy Alloway, and this is a very special edition of the Odd Lots podcast.

Joe Weisenthal (0:27)

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.

Tracy Alloway (0:55)

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.

Joe Weisenthal (1:17)

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 Eurodollar did not mean the EURUSD exchange rate.

Tracy Alloway (1:30)

It can be admittedly confusing. So why don't we just define it right away? So Eurodollars are dollar-denominated bank deposits held at foreign banks or overseas branches of US banks. And you can think of them as basically offshore dollars that sit outside the US banking system and kind of away from the Federal Reserve. They're basically a very special form of money. You could call them shadow money.

Joe Weisenthal (1:57)

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 the government spends dollars into existence or US bank credit, US banks license to de facto create dollars or deposits at will. And yet, Eurodollars are kind of this weird thing, I guess, because they're not that.

Tracy Alloway (2:21)

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.

Joe Weisenthal (2:59)

Thank you. And we literally, literally have the perfect guests to tell this story.

Tracy Alloway (3:04)

While we're trapped in this bunker or vault.

Joe Weisenthal (3:07)

Yeah, you might recognize our storytellers. We're going to be speaking once again with Lev Menand and Josh Younger.

Lev Menand (3:13)

I'm Lev Menand. I'm a law professor at Columbia Law School, where I study money and banking and the history of central banking.

Josh Younger (3:20)

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.

Joe Weisenthal (3:30)

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.

Tracy Alloway (3:39)

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.

Joe Weisenthal (3:47)

I love this. We should do all of our episodes like that or we just get to listen.

Tracy Alloway (3:50)

Just cut ourselves out.

Joe Weisenthal (3:51)

All right, let's do it.

Josh Younger (4:27)

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 Marshall Tito takes over in Yugoslavia. So, in 1945, 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, which is George Marshall of the Marshall Plan, he realized that 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 ship. They previously actually have 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?