The Hidden History of Eurodollars, Part 2: Defending the Dollar System

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Lev Menand (0:12)

Tracy, are we still doing this?

Tracy Alloway (0:14)

It seems like it.

Lev Menand (0:15)

Actually, what is this supposed to be?

Joe Weisenthal (0:17)

Is this a Cold War bunker or something like that?

Tracy Alloway (0:20)

That's a good question. Maybe it's a vault or the Vienna sewage system like in The Third Band. Do you remember that? That was a good movie.

Joe Weisenthal (0:28)

I should see that.

Lev Menand (0:29)

Okay. But in this episode, we've moved on from the immediate post-war period. We are now in the 1960s, a turbulent time for society and politics, but also for Eurodollars, which are the subject of our special series.

Tracy Alloway (0:42)

Yeah. This is the second installment of our three-part history of Eurodollars. If you haven't listened to our first episode, you should definitely go back and find it. We have been tracing the origins of this very particular and special form of money to better understand how it came to be and what it actually does. And our first episode looked at the creation of Eurodollars and their perhaps unexpected communist connections.

Joe Weisenthal (1:09)

Yep, that's right. And now we're going to turn the page. A new decade, a new chapter in Eurodollars' existence.

Tracy Alloway (1:14)

There's something else new that happens right around this time. So dollar swap lines get created. Do you remember those, Joe?

Joe Weisenthal (1:23)

I read about them in that Adam Two's book, Crash. But yes, they were big in 2008, then again in 2020, also the Eurozone crisis. They're basically something that no one ever talks or thinks about outside of a crisis.

Tracy Alloway (1:35)

Yeah, I think that's right. So they are dollar borrowing lines for other central banks. And I've seen swap lines described as the international lender of last resort. They tend to, as you mentioned, get tapped during big emergencies. That's when we hear about them. But swap lines basically allow central banks to exchange currencies. And in this case, it is all about getting dollars.

Joe Weisenthal (2:01)

And as a reminder, our storytellers for these episodes are Lev Menand and Josh Younger.

Lev Menand (2:06)

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 (2:13)

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.

Tracy Alloway (2:22)

When we left off, we were at the end of the 1950s. The Eurodollar market was just a billion dollars or so, but it's grown from pretty much nothing. And so it's starting to attract more attention from policymakers at central banks. And now, as we enter the 1960s, Eurodollars are even going to hit mainstream politics.

Josh Younger (2:45)

Let's take a listen.

So now it's the fall of 1960 Countries run for president in a very tight race against Vice President Richard Nixon. And in the background, the monetary system is in crisis. And it's really showing signs, not just of fatigue, but of potential collapse. And so to understand why that could happen, like what does that even mean, especially in the context of the 1960s, we kind of have to go back to the war. So it's 1944 now. And 44 countries are convening in Bretton Woods, New Hampshire. Small town, big hotel, they took up most of it. It's about 700 people. And the whole premise of this is to find a way to restructure the global economic and monetary system after the war's over. It's a little presumptuous, right? The war's not over yet, but they're still planning ahead. And so, you know, we hear a lot about Yalta and Potsdam and the big conferences about the partition of Europe and Berlin and so forth. But this is really among the most important of these post-war planning conferences, because it's the brainchild of Harry Dexter White, who most people haven't heard of as well. He's been at the Treasury since the mid-30s. He's a PhD economist, doesn't really like where he ends up for teaching. And Milton Friedman's professor recruits him to go to the Treasury to work for Morgenthau, who's FDR's very long-serving Treasury secretary. I think he's the second longest-serving after Gallatin, who was Jefferson's secretary. So he has a job for like 12 years, which is a long time to be a Treasury secretary. And there's really two competing visions going into this conference. The first is the American vision, which is a dollar-based global monetary order in which gold forms the foundation. So your dollars are convertible into gold. All foreign currencies, at least among the victors, are fixed in their exchange rates, are pegged to the dollar. And so everything kind of revolves around the US dollar and the gold stock that the US has accumulated over the course of the war. The US has two-thirds of global gold reserves at this point. So it's monetary gold reserves. So they have a lot of, let's say, leverage going into this conference, and they know it. And that's been a dream of Weitz since basically he joined the Treasury. He's been pushing for a global dollar system. He really wants the dollar to retake its prior position. Remember, in the 20s, the dollar was the global reserve currency, was the currency of trade. It lost that status over the 30s on a series of runs on the dollar. So he's very familiar with what happens when this breaks down. And he wants to bring the dollar back. This is the second bite at the apple. And so he wants the dollar to be part of global trade. He wants to be the unit of account. He actually wants all the invaded territories to use the dollar. So he wants invasion currency to be printed by the treasury. They call them yellow seal dollars. So he wants dollars everywhere, including in North Africa, Germany, et cetera. And they actually do that in some places. And the British, on the other hand, are very wary of this in large part because they don't have any gold. And so they have no leverage. But they're worried that the US will come out of this conference with way too much global power, especially relative to the European allies. And John Maynard Keynes is their champion. He comes up with an alternative arrangement. He calls it Bancor, which is a contraction of bonk and oar in French. I promised earlier I wouldn't do French words, so I apologize for the accent. But it's bank gold, which is the idea is there is no global currency issue by one country. There's only a transnational credit organization, kind of like a bank, where international trade happens on the books of that organization. So it's something like a transnational central bank, and it involves everyone giving up their sovereignty to some extent to facilitate global trade in what he considered sort of a fair and less arbitrary way. Meanwhile White is very aware of the potential sacrifice of sovereignty to use the dollars of global reserve currency and the global unit of trade. It's just he would prefer everyone else to sacrifice their sovereignty rather than the US.