The Hidden History of Eurodollars, Part 3: Spinning Out of Control
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How did the Eurodollar market emerge as a pressure valve for the Bretton Woods system?
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Joe. Joe, what's that moving over there? What's that shadow? It's the shadow banking system. It's getting bigger.
I think you've been down here, Tracy, in this proverbial bunker for a little too long, maybe. But no, it's the uh final installment of our three-part Eurodollar series.
Yeah, we've been tracing the history of Eurodollars, an incredibly important component of the global financial system, and at more than $10 trillion, the biggest form of shadow banking today. There has been post-World War II reconstruction, Cold War intrigue, 1960s politics, existential crisis in the dollar-based monetary system, but This right here, this is the moment when the Euro dollar market really takes shape and starts to look like it does today.
Right. If you haven't caught the first and second episodes of this series, you should first definitely go back and listen to them because if you don't, you're gonna miss out on a lot of the detail and you're not gonna really understand what happens next. But this is key because this is when the Euro dollar market that we talk about all the time and finance, et cetera, actually begins to assume its modern form and really emerge from the inflation and monetary shocks of the 1970s.
And of course this story is being told by two odd lots favorites, Lev Menand and Josh Younger.
I'm Lev Manand. I'm a law professor at Columbia Law School where I study money and banking and the history of central banking.
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.
Now, where we last left off, we closed out the 1960s. The Euro dollar market has grown to about $70 billion. And that growth has bought some time for policymakers who are trying to find a solution to the problem of funding dollar-based activity while maintaining the gold peg. Euro dollars have become a pressure valve, basically, to the Bretton Woods system. And they're helping it to stay alive.
But as a consequence of that, the Euro dollar market is now really booming in a wild way. And Nixon is about to do something really big in response. He's about to abandon Bretton Woods altogether and do that famous move where he went off the gold standard. So uh take a listen.
Okay, so now it's nineteen seventy, seventy-one, and things are really starting to go off the rails. The system is creaking and then swaying, and it really looks like it's about to fall down. And and Euro dollars are getting a lot of the blame. They're called this hydra-headed monster. People are really worried that this is the mechanism for funding the speculation that is being directed against the dollar and really threatening to bring the whole system down. And it's 1970. You don't have to be that old in 1970, remember the Great Depression. And one of the theories of the Great Depression that's pretty common at that point and still is today is that the depression itself was largely a consequence of monetary contraction, global monetary contraction.
So what does that mean in this context? If the dollar system fails, the money goes away. In a sense. And so that monetary contraction in the early seventies represents the same existential threat. This is gonna come back again. Everyone's really worried about this. This existential threat to the global economy, another Great Depression. No one wants another Great Depression. That's generally true, but it's very acutely true at this point in time.
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Chapters
6 chapters
1
How did the Eurodollar market emerge as a pressure valve for the Bretton Woods system?
0:00–9:43
2
What was the impact of Nixon’s 1971 decision to close the gold window on Eurodollars?
9:43–19:13
3
How did the 1973 oil embargo and petrodollar recycling reshape Eurodollar financing?
19:13–26:54
4
What was the Herstatt risk and why did it expose timing mismatches in foreign‑exchange settlement?
26:54–31:19
5
Why did Franklin National Bank’s 1974 run threaten the stability of the Eurodollar market?
31:19–35:55
6
How did the BIS‑led “whatever‑it‑takes” communique of 1974 backstop the Eurodollar system?
35:55–39:08
Speakers
5 identifiedMore from Odd Lots
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