Pod Insights Odd Lots The Hidden History of Eurodollars, Part 2: Defending the Dollar System About this episode In this special three-part series, Odd Lots is exploring the history of the eurodollar market. As we enter the turbulent 1960s, the eurodollar market has grown big enough to catch the eye of regulators. The Federal Reserve mounts a fact-finding mission to better explore this rapidly-expanding market. And soon, policymakers have to decide just how helpful eurodollars can be when it comes to solidifying and expanding the greenback's role in international finance at a time when the gold-backed dollar is about to be put under massive pressure. The story is told by Columbia Law School Professor Lev Menand and Federal Reserve Bank of New York Policy Advisor Josh Younger. Read more:Trump Team Studies Gradual Tariff Hikes Under Emergency PowersCanadian Ambassador Warns of ‘Tit-For-Tat’ Retaliation to US Tariffs Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.
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1:32 Joe Weisenthal? Tracy, are we still doing this?
1:35 Tracy Alloway? It seems like it.
1:36 Joe Weisenthal? Actually, what is this supposed to be? Is it, is this a Cold War bunker or something like that?
1:41 Tracy Alloway? That's a good question. Maybe it's a vault or the Vienna Sewerage System, like in The Third Man. Do you remember that? That was a good movie.
1:49 Joe Weisenthal? I should see that. 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.
2:03 Tracy Alloway? Yep, this is the second installment of our three-part history of Eurodollars. If you haven't listened- Into 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.
2:30 Joe Weisenthal? Yep, that's right. And now we're going to turn the page. A new decade, a new chapter in Eurodollars' existence.
2:36 Tracy Alloway? There's something else new that happens right around this time. So dollar swap lines get created. Do you remember those, Joe?
2:44 Joe Weisenthal? I read about them in that Adam Tooze book, Crashed. 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.
2:57 Tracy Alloway? 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.
3:22 Joe Weisenthal? And as a reminder, our storytellers for these episodes are Lev Menand and Josh Younger.
3:27 Speaker 05 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.
3:34 Speaker 06 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.
3:44 Tracy Alloway? 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.
4:06 Joe Weisenthal? Let's take a listen.
4:41 Speaker 06 So now it's the fall of 1960. Kennedy's running 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 is over. It's a little presumptuous, right? The war's not over yet, but they're still planning ahead.
5:26 Speaker 06 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. 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 Morgan Thaw, 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.
6:09 Speaker 06 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, pegged to the dollar. And so, everything revolves around the US dollar and the gold stock that the US has accumulated over the course of the war. The US has 2/3 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 White 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.
6:53 Speaker 06 It 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, etc. 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.
7:38 Speaker 06 He comes up with an alternative arrangement. He calls it bancor, which is a contraction of banque and or 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 issued 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 a fair and less arbitrary way. Meanwhile, White is very aware of the potential sacrifice of sovereignty to use the dollars as global reserve currency and a global unit of trade.
8:22 Speaker 06 It's just he would prefer everyone else to sacrifice their sovereignty rather than the US. And so, in the end, basically, the US wins. And they win because Lionel Robbins is one of the UK delegation. This is in Ben Steele's book. He basically says, "We needed the cash." So, they don't have a lot of leverage.
8:37 Speaker 05 This is a power grab by the US. The US is by far the biggest economy in the world. It has the prevailing military in the world. And there's an opportunity here for real internationalism and cooperation around global trade and the monetary system that facilitates it. And the US rejects that and essentially imposes an alternative system that puts the US much more in the driver's seat and everybody else in a more subordinate position.
9:08 Speaker 06 It's also, I mean, there's a lot of very humanism in this. Like by the end of the Bretton Woods Conference, it's three weeks long. No one thought it would go that long. They're tired, they're hungover. They went through a lot of liquor at this conference. There's no food left at the hotel. And so like, everyone just kind of wants to go home. Now, that's not a great reason to sign the world over to the US as a dollar-centric universe, but there really is like a human how all of this goes down. That's kind of one of the themes to this whole story.
9:33 Speaker 05 And multilateralism is hard. And there are a lot of frictions to get countries to cooperate on really, really high stakes issues for their domestic economies. And we'll see in the course of this story, how cooperation often breaks down and shortcuts prevail over longer term, higher cost solutions to problems.
9:57 Speaker 06 So the Bretton Woods system is one in which for $35, you can have an ounce of gold from the Treasury. And specifically foreign central banks, you have to be an official institution. I couldn't get $35 for gold, but the Banque de France could. And so the US is in a sense the world's banker because they're issuing dollars. And they can, in principle, issue more dollars than they have gold. So it's not a fully reserved system. There's leverage embedded in the international system. And so that happens pretty quickly because global trade expands and the US monetary gold stock is not increasing. Actually, most of the gold production is in Russia. So they're not giving it over so easy. And so over time, the world needs more and more dollars. And the value of those dollars implicitly starts to decline.
10:41 Speaker 06 Now, what does that mean in the context of a peg from the Treasury? The Treasury will always buy your dollars for an ounce of gold for $35. What does it mean for the value of the dollar to go down? Well, that's not the only gold market in town, right? And soon, on the continent, in London, at the metal exchange, it costs a little more than $35 to buy an ounce of gold. And that's really consequence of non-monetary demand. So you have some speculators, a huge fraction of gold in the world is held up in jewelry. Like, that's a real thing. So, you know, there's reasons you would want gold other than to back your currency. I think it's fair to say. And there are more and more of those reasons and more and more demand for those purposes over time. And so this introduces a fundamental instability into the Bretton Woods system. Because if a foreign central bank is exporting to the US, the US is running a balance of payments deficit.
11:25 Speaker 06 That means they're importing more than they are exporting. Dollars are piling up in Europe. Those dollars can in principle be exchanged for gold at $35 an ounce. That gold can be sold for $35.15 an ounce in London, and sometimes much more than that. And so slowly at first, then all at once, so to speak, the US gold stock starts to decline. At the same time as their dollar liabilities are going up. So now you owe more gold in principle to more people, but you have less of it with which to pay them. That's a bank run, or at least a slow-motion bank run. And so people get really worried that this is going to just accelerate, and they need some way essentially to staunch the bleeding. So, you know, you have a couple of options. And I should say, this becomes an election issue in Kennedy-Nixon.
12:10 Speaker 06 I mean, it comes up in the third debate. There's a big shock to the price of gold in October of 1960, where the price goes to $40 now, which is kind of insane if you can buy it from the Treasury at 35. And it kind of sticks there for a little while. And so Nixon is out there saying, well, Kennedy's going to blow up the dollar.
12:27 Speaker 07 Mr. Vice President, in the past three years, there has been an exodus of more than $4 billion of gold from the United States, apparently for two reasons. Because exports have slumped and haven't covered imports, and because of increased American investments abroad. If you were president, how would you go about stopping this departure of gold from our shores? Mr. Von Friend, the first thing we have to do is to continue to keep confidence abroad in the American dollar. That means that we must continue to have a balanced budget here at home in every possible circumstance that we can. Because the moment that we have loss of confidence in our own fiscal policies at home, it results in gold flowing out.
13:11 Speaker 06 And he initially kind of brushes it off. He says, oh, like, I guess Dick Nixon thinks I can trade gold in London. Like, that's hilarious. And eventually his advisers, like, you have to actually address this. People are really worried that your policies are going to lead to a collapse of the dollar. And so he puts out a formal statement as the candidate, pledging his support for the dollar. So this is really becoming an issue of national security. Like, people associate the dollar with the core of NATO and the free world. And Eisenhower is pretty explicit on this point. Kennedy is pretty explicit on this point. I mean, the collapse of the dollar is like not an acceptable outcome because it really reflects a collapse of the anti-communist alliance that's developed in the past 10 years.
13:53 Speaker 06 So it's kind of core to the US's sense of itself, that the world remain on a dollar standard, that the dollar remains strong.
13:58 Speaker 05 Part of what's gone wrong here is Harry Dexter White, in crafting this new system that puts the dollar at the center, has given something up to everybody else. And that's the peg of the dollar to gold at $35 an ounce. And the power that is given up by the US to all those foreign central banks to allow them to withdraw gold at that exchange rate. And at the time that this is done, the US has so much gold stock. But what has happened is we have recreated 19th century conditions by essentially bringing
14:43 Speaker 05 back a gold standard and the rigidity that goes with it, and the runability on the currency that goes with it. We're not used to the idea of running on the currency in the United States today. But that was a problem that countries experienced a lot when they had convertibility to gold. And so we're in the post-war world here, and we have brought back convertibility to gold, all the risks that go with it and the rigidity that goes with it, because we no longer have the ability to control the elasticity of the money supply.
15:21 Speaker 05 There's this sort of bomb built into the system where if everybody decides to redeem all at once, the money supply is going to start contracting rapidly, they're going to have a crisis of confidence. And so here we are in 1960, in some sense, at the apex of US power, confronting the possibility that we could be in 1932 all over again with a series of withdrawals and the US dollar breaking the peg. And that comes to take on this great significance, the idea that we won't be able to maintain the peg. Of course, from an optimal design perspective, you really want to be able to adjust that peg.
16:06 Speaker 05 But you've said it's going to be $35, and now suddenly, in the Cold War world, in global politics, and even in domestic politics, this idea of the dollar maintaining its value takes on this great sense of significance, and increasingly, US policymakers are in a bind.
16:42 Speaker 00 What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say. We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service institutional clients. As more capital enters the market, adaptive regulation is likely to become increasingly key. Rees-Merrick of Ripple says. A lot of regulators globally would like to keep the industry at arm's length. That's the
17:19 Speaker 05 The opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80 year old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.
17:34 Speaker 00 Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.
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18:13 Speaker 06 So in a speech to the IMF in September of 1962, Kennedy is very clear on this point that the dollar, the importance of the dollar in the fight against communism is critical to his administration.
18:23 Speaker 05 The security of the dollar therefore is and ought to be of major concern to every nation here. To undermine the strength of the dollar would undermine the strength of the free world. We are taking every prudent step to maintain the strength of the dollar, to improve our balance of payments, and to back up the dollar by expanding the growth of our economy. We are pledged to keep the dollar fully convertible into gold and to back that pledge with all our resources of gold and credit.
18:58 Speaker 06 This is the thing. You can fix the problem one of two ways. You can change the peg slash change the system, or you can find ways to reinforce it through sort of makeshift measures. These are the shortcuts, right? And so, you know, Kennedy thinks this issue is public enemy number two. Number one is nuclear war. Number two is the stability of the dollar. He actually tells Arthur Schlesinger this of the course of the campaign and then into his early presidency. And so the question is, how do you do it? So among those two options, he commissions the task force. He's elected. He turns to Adelie Stevenson and he says, what do I need to focus on? And Stevenson says, definitely the dollar. In fact, this whole system isn't working, so we probably want to think about a new one. And Kennedy doesn't like that answer because Kennedy is sensitive to a lot of different
19:41 Speaker 06 things. One is he's portrayed as young and inexperienced. There's actually memos in the campaign about how to deal with the youth and inexperience issue. And so he's very sensitive to any sense that he's not up to the job. And he tells his advisors, if this thing falls apart, it's going to be on me. And so he doesn't like that generically. He's also fundamentally an institutionalist. He doesn't love the idea of dramatic change. He doesn't like taking those risks. And so he basically doesn't like what Stevenson and George Ball have to say. So he says, I want a new report. So he gets Alan Spruill, who is the outgoing, I think he'd left a couple of years earlier, president of the New York Fed, to write a different report. And that new report says, don't mess with it. It's probably fine. It's not a crisis. The public's impressions are wrong, but you
20:24 Speaker 06 need to address this forcefully, but don't do anything drastic. And so he basically takes that to heart implicitly. The question is, who's going to execute on this?
20:34 Speaker 05 And you think about this from the perspective of Kennedy, who's just been put into this very difficult job. And his advisors come to him and say, actually, we have an international monetary system with a basic flaw in it, which is the dollar is pegged to gold at $35 an ounce, and it's ultimately going to have to break that peg. This system doesn't work. We should do something else. You're like, is there some way to keep the thing going? And that's what leads to the second report. And that's what leads to the growth of the euro-dollar market, because it turns out that the way to keep the thing going is to develop this offshore dollar alternative.
21:14 Speaker 06 Yeah. So now we can meet some actual characters in this story. So there's the Treasury team that comes in with Kennedy is led by, at least with respect to this issue, is two people in particular. One's Douglas Dillon of Dillon Reed. His father founded Dillon Reed. He's one of the wealthiest people in the United States, the former ambassador of France. And he was selected in part because he owned a vineyard, Au Priez, actually, so a very well-known vineyard in Bordeaux. So he had French roots, sort of, and does a good job. He's put at state. He's a contender for Secretary of State when leaves, he ultimately doesn't get the job, but Kennedy wants to put someone at Treasury who has a good business reputation, who is well respected, has government experience. And people generally like this guy. He's like seen as one of those consummate bureaucrats
21:56 Speaker 06 who's like sharp and thoughtful and a good listener and clear and all of those things. And so he brings with him Bob Russo. Bob Russo is from the New York Fed. He actually served in the Second World War under Charlie Kindleberger. Charlie Kindleberger is the father, in some sense, of the idea of the dollar as a key currency, or at least a big proponent of it, but they were doing strategic bombing targets together. Kindleberger was his commanding officer. So he had some connections to this idea through his wartime experience of a global dollar system. And their bias, both of them, is to reinforce the existing system. They kind of want to find a way to save the Bretton Woods arrangement. So here's Bob Russo, looking back from a few years later. We got them to recognize after the big flurry at Kenwood Head, October 20th, 1964,
22:41 Speaker 06 when the market went up to a $40 price. At that time, that was looked at as quite a threat to the stability of the monetary gold price, and got them alarmed. And so after that, when it was clear, particularly by the time President Kennedy came in and made it firm that we were going to continue to support $35 price, and then the London price began coming down, it was fairly easy to persuade these other countries that, you know, we ought to be together in this because as gold comes back into the market now, we,
23:26 Speaker 06 the United States, don't want to have to just have it appear that we're always taking all the gold out, putting it in sometimes too, of course, but why don't we share this as a buying pool when it comes into the market at 35?
23:44 Speaker 06 We won't be in there bidding against each other. It'll be an orderly arrangement. It'll be a little bit of like a cartel, but in the interests of the world monetary system. On the other side, you have Walter Heller. Walter Heller is the Chair of the Council of Economic Advisers. Kennedy's trying to balance out Dylan's like somewhat conservative Eisenhower administration reputation with someone who's much more on the New Deal liberal side of things. And the New York Times calls him a prototype of the liberal economist. He's very well known for his tax policy views and he often talks in terms of human flourishing, right? We should adjust the tax code to promote human flourishing. And he brings with him Jim Tobin, who is a very well respected economist. He won the James Baker Clark Medal, which is kind of like a Nobel Prize-ish thing in 55, so he's already very well established.
24:28 Speaker 06 He comes in as one of the economists on the council and in particular the one tasked with international issues. And so they think this whole thing is flawed from the start and their push to the president elect and eventually the president is to do something brand new and think about all kinds of different arrangements. Heller sends out a ton of memos that kind of list, he says he does it with Russo, but it's clear like who's who in this. And it turns into a pretty contentious argument. I mean, there's actually in the Kennedy Library Archives, they have little political cartoons the Deputy National Security Advisor Drew making fun of Bob Russo and like all the stuff he's trying to do at the same time. And in some of these memos, they're kind of derogatory, like, you know, no one really believes what this guy is writing. So there's a lot of tension between the Treasury and the White House.
25:10 Speaker 05 Kennedy appoints Dylan, who is a prominent member of the opposing political party. So here we have this new Democratic administration coming in and one of the most important cabinet posts goes to a very wealthy Wall Street scion from the other political party. And so the battle within the administration is also for the future of financial policy in the Democratic Party, where you have the New Deal liberals, the FDR crew, fighting this basically interloper who's Dylan and losing because time and again, as Kennedy
25:55 Speaker 05 himself notes. Dylan thwarts the New Deal liberal economists in the administration. And Dylan is the one who ultimately crafts the policy of the administration and the policy that comes to dominate Democratic administrations that succeed Kennedy as well. And so this is a very important turning point in how the executive branch in Democratic administrations approaches financial policy. And it's no longer the FDR vision that is in the driver's seat.
26:30 Speaker 06 And ultimately, every time they're pitted against each other, the Treasury basically wins those arguments because the Treasury is advocating stability and the CEA, the Council of Economic Advisers, is advocating upheaval. Now, maybe productive upheaval, but something very dramatic. And so Kennedy really isn't predisposed to go with the upheaval side of things. And they keep it up, but ultimately, he wants to reinforce the existing system. So the question is, how do they do that? How do euro dollars come in? So the first thing they do is they try to figure out what euro dollars can do for them. And the key here is to keep a global dollar system, but to have it all offshore. Because one of the big problems with the balance of payments is that Americans are
27:14 Speaker 06 investing overseas, which means pushing dollars out of the US and taking in financial assets. So the dollars are leaving, financial assets are coming in, and that's a big source of the flood of dollars into Europe and the risk that those dollars will then be turned into gold. And so you basically want to push all of that activity, all those foreign corporations that want to borrow dollars, don't borrow them in New York, borrow them in London. And there's two ways to do that. One is you can provide incentives to push that activity offshore. They do that using the tax code. And the second is to make the euro banks, the euro dollar issuing banks, more attractive to potential investors so they can grow their business. Because if you want to take US financial activity and push it offshore, you need to
27:56 Speaker 06 make sure the euro dollar system can accept it, can grow to accommodate a much higher volume of transactions. And whenever banks take on more liabilities, which is the same as taking in deposits, the risk of a run grows. And so this is where people become very acutely aware of the risk that Lev talked about, which is in the US, if you have liquidity problems, you can go to the Fed. In Europe, if you have dollar liquidity problems, there's nowhere to go.
28:23 Speaker 05 The goal here is not to get US financial activity offshore for its own sake. The goal is very much to stop holders of dollars, especially foreign central banks, from going to the gold window at the US Treasury and draining our increasingly shrinking gold reserves. And so this is a sort of a two-step move. We're going to have new investment opportunities so that you don't want to go and withdraw the gold, so that you hold your dollar balances offshore. We're going to build up this market. It's going to be what they call the outer defenses
29:07 Speaker 05 of essentially the Bretton Woods international monetary system.
29:11 Speaker 06 It's basically what Sproul advocates in his report. It's all about confidence, right? So we don't actually need to provide anything other than assurances that someone's going to have their back. Because this was always a concern when the euro-dollar market was growing, is that, you know, who's going to solve the problem of liquidity if everyone goes to their eurobank at the same time? And so what Dylan and Rusia come up with is the swap lines. Now, the swap lines are initially from the Exchange Stabilization Fund, which was created in the 30s to intervene in foreign exchange markets. So it allows the US government to buy foreign currency. Buying foreign currency is the same as giving other people dollars, right? You're just saying, I need something in return. It might as well be sterling or francs or something like that. Now, the problem for Dylan Rusia is the ESF is what's called a funded vehicle, meaning it only has so much money.
29:55 Speaker 06 And by the early 60s, they've made a bunch of commitments to Latin American countries that basically mean there's no gunpowder left. The resources they have at their disposal through the ESF, which is controlled by the Treasury, are minimal. But guess who has essentially infinite resources when it comes to printing money? Is the central bank. And so they want to be able to intervene in foreign exchange markets, which is a different word for lending dollars to foreign central banks that could then lend them to euro-dollar issuers. And so if a eurobank comes into trouble, which they will do with some frequency throughout the 60s, they go to their central bank and say, I need dollars. That central bank goes to the Fed, in this case, and say, I need dollars. And so you can lend those dollars that effectively
30:39 Speaker 06 backstop non-US banks. So they do it through a swap transaction, but that's just the way they structure it. The question is, is the Fed comfortable with this? Because they had done some foreign exchange transactions in the past, but it wasn't really a core part of what they did previously. And they didn't have a standing authorization to do what are called open market operations in foreign currencies. So these swaps are a new kind of open market operation that the committee, the FOMC, the Federal Open Market Committee, needs to decide is legal authorized, is within their mandate, is something they're comfortable with from a policy perspective. And Bill Martin is the Chair of the Fed. He's been the Chair for a while at this point. He's actually the Treasury negotiator for the Federal Reserve Treasury Accord
31:24 Speaker 06 that de-pegs the bond market after the Second World War. So he's been around DC a lot. He's a very well-known character. He's a very powerful chairman. And he is sort of, at least based on some of the oral interviews that are done later with Bob Russo, among others, pretty uncomfortable with this idea. And it's pretty controversial across the committee. Now, they don't reject it outright, but they are wary. But Kennedy and Dylann and Russo are pretty adamant that this sort of has to happen. And they put a lot of pressure on Martin. And eventually, they offer Treasury's General Counsel to author an opinion saying this is legally authorized. And then they get Bobby Kennedy, which the Fed didn't ask for, to write an opinion saying this is legally authorized. So they can have something in their back pocket when Congress asks questions. And Congress does ask questions pretty quickly.
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33:31 Speaker 06 In one of his oral history interviews, Russo remembers the debate and the Fed's concerns in particular.
33:36 Speaker 05 Getting the swap started, there were two problems. Of course, other countries were suspicious of that, too, didn't know quite what we had in mind. And incidentally, I had to research the existing legislation very carefully, but I discovered that we didn't need laws. I could go ahead and do it under present legislation. I had to get a ruling from the General Counsel. The Federal Reserve was very suspicious and reluctant. You know, it's a big body, people from all over the country, and you can't sit down and explain it all to them all at once and expect it to go across. So I figured, and Dylan certainly agreed with this, what we had to do was prove it to them.
34:19 Speaker 05 What we had to do there with the Fed was get going by having the New York Fed, through Coombs, arrange a swap line with this bank or that central bank using Treasury money. Treasury didn't have very much money. The Stabilization Fund at that time and free money, we had less than $300 million. But I did a little bit of double counting. You know, I'd make a deal with Germany for $100 million, and France for $50 million, and England for $50 million, and maybe added up to $400 or $500 million, always assuming I'd never have to use them all at once.
35:03 Speaker 05 I got up to $1 billion by the end of the first year, and we had used them a little by that time. Not for the US, but for the British. And it had proved itself enough so that we could then go to the Federal Reserve and say, "Look, this is a perfectly workable arrangement. These are short term. You get the deposit of another currency when we pay out ours. This is ideal for the central bank to do." And you can see why they're worried about this, right? In the 1930s, Congress sets up the Exchange Stabilization Fund and puts it in the Treasury
35:43 Speaker 05 Department, limits its funding, and says, "This is the way the US government is going to manage exchange fluctuation of the dollar against other currencies." And now we have the Treasury going to the Fed and saying, "We don't have enough gunpowder. Can you do it for us?" So the Fed might think, "Well, go to Congress and get more appropriation. You're kind of putting us in a tight spot here." This is just sort of also stage one, which is the foreign exchange swap lines. There becomes an additional pressure point for the Fed, which is the swap lines that are also set up in parallel to support Eurodollar issuance overseas.
36:27 Speaker 05 So the sort of conventional swap lines, the sort of standard account of this period when the swap lines are set up, it's all focused on replacing the ESF to intervene in foreign exchange markets. But they set up these parallel swap lines that are about lending dollars to foreign central banks. And there, you have the Fed also in a spot because the Federal Reserve Act was not set up with the idea in mind that the Federal Reserve would be essentially facilitating the backstopping of Eurodollar issuers in overseas markets.
37:06 Speaker 05 But the Treasury is gung ho, and this is existential for the administration because they have tied themselves to the mast of the $35 peg, and they are afraid of both the political and financial consequences of showing any weakness. And so just even to have the Treasury Secretary go to Congress and say, "We don't have enough resources in the ESF." They would be afraid about the lack of confidence that that might signal to the market about the American ability to keep to the $35.
37:43 Speaker 06 So they get the approval eventually with the backing of the Treasury General Counsel and Bobby Kennedy and everyone kind of gets together and the committee approves. And so now they have swap lines and they need someone to run them. And so this is where we meet kind of the third character here. This guy Charlie Coombs, kind of the true believer. You can think of Douglas Dillon as kind of the operator. He's like M in the James Bond canon. You could think of Bob Russe as Q, right? He's coming up with all the ideas with the different gadgets they can use. But 007 is Charlie Coombs. Francis Schott was his liaison with the Treasury in those early years and he remembers Coombs as a quote unquote CIA type operator.
38:19 Speaker 07 Well, he was a pretty complex personality, but underneath it all, he was a CIA type operator. He was a discreet spy who had the national interest of the United States, which he thought he knew exactly what it was at heart, and he was willing to do almost anything in order to achieve those objectives. He was a true operator.
38:44 Speaker 06 And now, we don't know this for sure, but he was actually counterintelligence during the Second World War. He ends up in Greece in 1947, right after the Civil War starts. That's the origins of containment. It's the first CIA hot zone, they called it. And then he comes back to New York. He's a PhD economist and gets Bob Russe's old job, actually. He was Russe's deputy and then he gets Russe's job and then he's selected as the special manager for foreign exchange in 1962. Now, the system open market account manager manages the bond portfolio, still does, but they create a new position that's very senior in the organization called a special manager for foreign exchange and his job is to negotiate and operate the swap lines. And the understanding seems to have been that the Treasury would call the shots.
39:27 Speaker 06 They're what one of their former officers, who was actually the gopher between the Treasury and the Fed, described as the Treasury having political authority and the Fed having technical authority, meaning the Treasury is ultimately calling the shots for who gets what when. And the Fed goes out and makes that happen. Now, we just Know that from one oral interview. So like what actually happened on a day to day basis is harder to say, but it was generally acknowledged and Rusia represents to Kennedy. The fact that treasury is sort of in charge of international relations in a financial context. And so Charlie runs around Europe, setting up swap lines. He starts with London and Paris and the usual places. He also ends up in Basel, Switzerland. Now Basel, Switzerland is the headquarters of the Bank for National Settlements.
40:08 Speaker 06 Which is an old institution. It comes from, I think, 1931 it's founded and it's essentially a bank to central banks. So it's a convening point for central bank, still is. It's a very important institution. They have their own banking services today and in the 1960s. And so he sets up a secret swap line with the Bank for International Settlements. That is in currencies other than Swiss francs, despite the fact that they're in Switzerland. And the explicit purpose of that. Which recent research has sort of revealed through archival stuff is to support the euro dollar market. And they do that in Switzerland. They do it around year end, sort of seasonal stringency. They provide liquidity to the euro dollar market. So they're actively supporting the stability of euro banks.
40:49 Speaker 06 As soon as these swap lines are in place, they're relatively active use. And so now you have this reciprocal credit agreement network. That's what they call it. They didn't call them swap lines at the time. Kennedy tells Congress about this in his balance of payments message and he's like very proud of this is like one of the clever, effective backstops to the global dollar system. Because now the US can use the firepower of its central bank to keep the dollar stable and strong internationally.
41:17 Speaker 07 But as this started out, Rosa, who by then was a federal government official, was asserting the supremacy of the political arm. And Coombs was, and Alfred Hayes and William McChesney Warden were trying to assert the supremacy of the technical arm to carry out the technical operation. You know what I mean? Coombs and his associates were trying to make this look like you have to be really good for an exchange man and know the markets in order to know what you're doing.
41:56 Speaker 07 And Dylan was saying, buzz off. This is you're intruding on foreign policy territory and we know best what to do.
42:08 Speaker 06 You know, this is the point where the system can really grow. So euro dollars now have implicit backing from the Federal Reserve, or at least by arm's length through the BIS. They have a source of liquidity in dollars and so they grow rapidly. And the interest equalization tax, which is the mechanism by which they pushed some of this financial activity offshore, provides yet another use case. Euro bonds are issued, which is just dollar denominated bonds listed in Europe, funded with euro dollars. The proceeds of those raises go into the euro dollar system and everything's kind of set up for a virtuous cycle. And by the end of the decade, it's a massive market.
42:44 Speaker 05 You go from like half a tether to a Bank of America.
42:48 Speaker 06 Yeah, in 1970, it's the $70 billion market. If you size that to the US economy, it's about $1.8 trillion in today's standards. So it's a very big market by the end of the decade and it's starting to be more trouble than it's worth. So there have been warnings along the way. This thing might be a problem. It's funding speculation potentially against the dollar. It's somewhat unstable. Regulations are not uniform. There are some attempts to control it, but the US kind of juices is a bit by regulation Q is adjusted in a way that facilitates euro dollars. And other reasons for that that made sense domestically, but they're willing to let the euro dollar market grow. They don't really put reserve requirements on it. And actually, Martin is quite resistant even to putting reserve requirements on US bank branches that are raising euro dollars.
43:31 Speaker 06 He tends not to bring the issue up in meetings. And now you have this, let's call it 1.8 trillion in today's terms, growing 25% a year. And people are starting to get worried, like really worried. And the French Foreign Minister, who coined the term exorbitant privilege, calls it a hydro-headed monster. This is now people are getting. Worried that the system is going to eat itself. So this is such a successful solution to the immediate problem of offshoring US financial activity, that by the end of the decade, you have continued gold outflows, funded in part by speculation through the euro dollar market and rapid movements of capital between different places, searching for either safety or higher interest rates or both.
44:11 Speaker 06 And so the whole system is getting very unstable because at some point, one of these two things has to give. Either euro dollars have to be controlled, or the system has to get completely reworked. And it's unclear in the early 70s, which of these two forces is going to prevail.
44:33 Tracy Alloway? Dun dun dun. What a cliffhanger. Okay. That was the second episode of our special three-part series examining the origins of euro dollars. So by the end of the 1960s, this market has grown from essentially nothing to about $70 billion. And that growth has been essential to maintaining the Bretton Woods system. But the question is, at what cost?
44:59 Joe Weisenthal? Next time, things are about to get a little crazy as we head into the 1970s and beyond, just sort of a wild decade, I think, for monetary policy. Nixon famously shaking up the entire post-war monetary system. People love to talk about the Nixon gold shock, like what happened in 1971? All these great wild charts, they're always floating around on gold and crypto Twitter. But if I'm being honest, I have very little understanding of what that actually was, why he did it, what it meant, why it was done and so forth. So I'm looking forward to finding out.
45:31 Tracy Alloway? Yeah, there's the gold shock and there's an oil shock. And there's also a kind of financial shock in the form of a somewhat mysterious bank collapse. And we hope you'll join us for the third installment in our ongoing series in which Josh Younger and Lev Menand continue the story of euro dollars. But in the meantime, this has been another episode of the All Thoughts Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.
45:59 Joe Weisenthal? And I'm Joe Weis. You can follow me at the Stalwart. Follow one of our special guests, Lev Menand. He's at Lev Menand. Our other special guest, Josh Younger, he's not on Twitter. Thanks to our producers, Kermit Rodriguez, at Kermit Arman, Dashal Bennett, at Dashbot, and Kale Brooks, at Kale Brooks. 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.
46:31 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 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.
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Previous The Hidden History of Eurodollars, Part 1: Cold War Origins Next The Hidden History of Eurodollars, Part 3: Spinning Out of Control Page updated November 5, 2026 · transcript and summary are machine-generated
