Pod Insights Odd Lots The Hidden History of Eurodollars, Part 3: Spinning Out of Control About this episode In this special three-part series, Odd Lots is exploring the history of the eurodollar market. By the 1970s, eurodollars are hitting the headlines — and not in a good way. While this new form of money initially acted as a pressure valve for the Bretton Woods system, many now think the eurodollar market has spun out of control. What happens next — including Richard Nixon's decision to take the US off the gold standard — will not only shape the ultimate contours of today's eurodollar market, but will also give us the modern financial system itself. The story is told by Columbia Law School Professor Lev Menand and Federal Reserve Bank of New York Policy Advisor Josh Younger. Read More:US Aims to Tighten Flow of TSMC and Samsung Chips to ChinaRussian Crude Oil Piles Up Near Chinese Coast After US Sanctions 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.
0:15 Speaker 01 Games on a break? Don't doom scroll. Try rips on Underdog. Buy a digital pack, rip it open and reveal a real physical card. Football, basketball, even Pokemon. Packs start at just $5. Ship it straight to your door or sell it back instantly at full market value. Max value up to $125,000. Download Underdog and get in on the chase. Deposit $5, get five free packs. Real rips, real cards, real cash. Only on Underdog. Unleash your dog. 18 plus, terms apply. Top grails are extremely rare.
0:48 Speaker 02 Bloomberg Audio Studios. Podcasts, radio, news.
0:56 Tracy Alloway? Joe, Joe, what's that moving over there? What's that shadow? It's the shadow banking system. It's getting bigger.
1:04 Joe Weisenthal? I think you've been down here, Tracy, in this proverbial bunker for a little too long, maybe. But no, it's the final installment of our three-part Eurodollar series.
1:13 Tracy Alloway? 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 Eurodollar market really takes shape and starts to look like it does today.
1:46 Joe Weisenthal? 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 going to miss out on a lot of the detail and you're not going to really understand what happens next. But this is key because this is when the Eurodollar 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.
2:12 Tracy Alloway? And of course, this story is being told by two Odd Lots favorites, Lev Menand and Josh Younger.
2:17 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.
2:24 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.
2:34 Tracy Alloway? 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. Eurodollars have become a pressure valve, basically, to the Bretton Woods system, and they're helping it to stay alive.
3:02 Joe Weisenthal? 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 take a listen.
3:51 Speaker 06 Okay, so now it's 1970, 71, and things are really starting to go off the rails. This system is creaking and then swaying, and it really looks like it's about to fall down. And eurodollars are getting a lot of the blame. They're called this hydro-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 to 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.
4:33 Speaker 06 And so that monetary contraction in the early 70s represents the same existential threat. This is going to 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. I think that's generally true, but it's very acutely true at this point in time. And so- In the summer of 1971, things are just completely untenable. And Nixon, after a few days huddling with advisers at Camp David, just says enough with the whole thing, right? So he closes the gold window. This is the Nixon shock. On a Sunday evening, he addresses the country and he says, among other things, we're not going to be giving you gold for your dollars anymore.
5:09 Speaker 07 In recent weeks, the speculators have been waging an all-out war on the American dollar. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar in the gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.
5:40 Speaker 06 This has all kinds of repercussions and it's dealt with in various ways and there are attempts to mitigate the effect of it. But like for the euro-dollar market in particular, it signals a shift towards a degree of flexibility and a lack of a need to have this thing to plug the balance of payments gap because all of a sudden we're in a floating exchange rate type of world and the imbalances can be corrected through the foreign exchange market, just like people sort of intended for a long time, as opposed to through financial engineering and different ways to sort of prop up essentially a gold exchange standard. So that was a major shift in policy and it was a big signal that the US was willing to rock the boat and that hadn't really been the case previously. And you can see that in this clip of John Connolly, he was Nixon's Treasury Secretary,
6:24 Speaker 06 talking to the British Ambassador a few months after that in the winter of 1971.
6:27 Speaker 02 Mr. Ambassador, Walter. John. How are you? Couldn't be better. That's great. Well, I'm delighted to hear from you and I'm looking forward to seeing you. John, may I tell you how very much I admire your drive, your initiative and, and the change of pace you use. Well. You keep everybody guessing. That's right. Well, we've got some tough problems. Water, as you well know, it's hard to deal with ten nations at the same time and it just takes a lot of everything out of us and the president has just been magnificent
7:08 Speaker 02 in his approach and his support, so I'm trying to carry out his wishes as best I know them and I think we're gonna make some headway and don't you let anybody kid you that we're trying to tear things up. We've been the most forthcoming, the most expansionist nation in this world. You just take it from me. We want to settle this thing and we've offered more to settle it than any other nation in the world's offered, water. The reaction around Europe is that you're pretty close to a deal, that a deal has been roughed out. It's just a question of the president and some of the leaders putting the finishing touches on it. At least that's the reaction that I get out of all the countries
7:53 Speaker 02 over here. Well, water, that's right. The president's options are entirely open to him. We've tried to structure it in such a way that we're fairly close, but those countries over there have to be forthcoming a bit now. We've already gone further than we should, but the president has the options and if there, if Pompidou, Heath and the rest of them are halfway reasonable, I think it can be settled in the next month. Very important because if we let it drag on after January, you could get into a sticky situation. I understand. And psychologically, that could be unattractive. That's right. That's what I tell them. They all preach that we're gonna have a recession
8:36 Speaker 02 or worldwide depression and I say, "Well, if you all really believe that, you all come up with something. We've made you an offer. We're willing to take less than we deserve to keep that from happening. Now you all come forward." But they talk one way and act another. That's the problem.
8:52 Speaker 05 Remember, in the 1960s, we have US policymakers embracing the euro-dollar market to save Bretton Woods, not for its own sake, not to help the London financial institutions compete in a dollar world, but to save Bretton Woods, to win the Cold War, to not embarrass ourselves in front of the Soviet Union. And now we have Nixon saying, you know what, to hell with it. Actually, this gold drain, we need to get ourselves out of this. That approach that Kennedy rejected almost a decade earlier, Nixon embraces. And suddenly, the question is, well, why are we tolerating this destabilizing euro-dollar market? We've decided to just rip the Band-Aid off.
9:33 Speaker 06 So now people can think about regulating it, because it's not as essential anymore. And so, the BIS, the Bank for International Settlements, in Basel, recipient of the swap line to support the euro-dollar market, also starts convening central bankers and experts and so forth to try to figure out a way to regulate the market. And what they discover quickly, they come up with a standing committee on the euro-dollar system. It's convened in the early 70s after the Nixon shock, and it basically doesn't come to any firm conclusions. They agree to have a standstill, which means no new central bank deposits. Remember, central banks are the largest or among the largest depositors, supporters of the euro-dollar market. They're putting their own money there. So they agree, basically, to stop doing more of that with a, maybe we're going to think about reducing our holdings in the future,
10:15 Speaker 06 which is like, not exactly the most aggressive regulatory response, but it's something, and it's basically the only thing they can agree on.
10:22 Speaker 05 Right. Remember, multilateralism is hard. We spent the last 10 years, basically, a group of central banks building up this market to try to save this Bretton Woods system. You have all these foreign central banks investing their own reserves into these euro-dollar deposits of their domestic banks to try to nurture it. You have the US with its swap lines, trying to suggest there's a lender of last resort backing to try to nurture this market. It's this major project that everybody is engaged in. And all of a sudden, you have Nixon walking away from the whole system. And now, can we agree on what to do with the euro-dollar market? Unsurprisingly, no. Everybody's like, oh, whoa, we have this whole thing that we built up. What are we going to do with it?
11:06 Speaker 05 And the best they can sort of do is say, well, we're going to stop making it bigger. It went from half a tether to as large as one of our major banks today. And larger, really, by the early 70s. It's like we had a Bank of America and a Citigroup just totally operating offshore in Europe. But the tide has turned at this point, and you might think that there's going to be a crackdown. But then the euro-dollar market gets another Deus ex machina in the form of a massive dislocation in energy markets. Here's a clip from Nightly News with John Chancellor, which is indicative of what you would have heard during this period.
11:43 Speaker 06 Good evening. The Middle East war produced developments all over the world today. The oil-producing countries of the Arab world decided to use their oil as a political weapon. They will reduce oil production by 5% a month until the Israelis withdraw from occupied territories. If the Arab countries keep that pledge, it would reduce their production by almost 50% in one year. So it's the fall of 1973, and conflict in the Middle East leads to an embargo by the Saudis against the United States. They will not ship oil to the United States, and that causes the price of oil to skyrocket. What does oil have to do with the euro-dollar market?
12:23 Speaker 05 Oil has something to do with everything, right? Think about everything that we use. Oil is an input into the cost of everything that we use because we have to pay to get that to you. And oil is what is fueling global trade, quite literally. So if oil prices double or quadruple, that's going to be felt across everything that you buy in consumer goods markets.
12:47 Speaker 06 Not good for inflation and also not good for the global financial system because now, like, when oil goes up in price, it sort of creates a lot more money, in a sense, because the value of this thing that's flowing around the world has gone up in value a lot, somewhat, you know, exogenously. And so the world has to find a way to deal with the money associated with the flow of more expensive oil. And so oil is not unique, but is special in the sense There are producers and consumers. So the producers of oil are taking in money and providing oil. The consumers of oil are spending money and taking in oil. And so the difference between those two is that the producers of oil want short term liquid investments to hold the proceeds of the oil sales in, safe, short term, easily accessible.
13:31 Speaker 06 They could put some of that into their domestic economy, but not all of it, especially when the price quadruples. The consumers of oil don't want to pay that back every day. They want long term, ideally fixed rate loans in many cases. So there's a maturity mismatch. There are borrowers of money to buy oil want long term loans. The investors or sellers of oil want short term investments. And so who provides intermediation when you have a maturity mismatch? Banks. And so you need some way to allow for long term lending and short term borrowing. Eurod banks are very well set up to do this because it's basically what they do already. The actually LIBOR was invented for euro dollar borrowings to allow them to do long term maturity loans without taking the interest rate risk.
14:14 Speaker 06 They have this whole mechanism for making loans that are not going to necessarily blow them up on an interest rate risk basis, but have a longer maturity. Euro dollar deposits are considered safe in part because of the swap network and its perceived backstop. The availability of some form of lender of last resort, although it's somewhat murky and complicated. And so the euro dollar system is one means by which to accomplish what becomes known as petrodollar recycling. So the proceeds of oil sales getting recycled back to the consumer of oil and on and on again in a circle. And that's the thing that keeps the world going because in a world where oil supplies are suddenly interrupted, just like Les said, I mean, it's in everything, right? So if you suddenly cut off the supply of oil, either through embargo, but more importantly, through financial collapse, where you can't actually find a way to move the oil because the money isn't there when it needs to be there.
15:00 Speaker 06 That's another recipe, yet another great depression risk. People are very worried that the collapse of the financial system that provides for oil to make it where it needs to go will simultaneously collapse world trade. And that's yet another theory of the great depression, the collapse of monetary system, the collapse of world trade. So they're looking at a very similar set of risks.
15:19 Speaker 05 And it's hard to overstate how scary this is to policymakers at the time. Because we're engaged in this Cold War with the Soviets. And there's a massive shock to our whole economic system that is threatening to disrupt our whole monetary system, which policymakers have spent the last decade plus agonizing about and concerned that it might go the way of the system in the 1930s and jeopardize this whole almost civilizational conflict that the United States is engaged in at the time. And so, once again, the euro dollars are there to sort of save the day in the sense
16:01 Speaker 05 that policymakers, they know their euro dollars are a problem now, but they need a solution to this oil price shock. They need to figure out a way to facilitate the recycling. And the euro dollars are, in some sense, the easy way out.
16:32 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 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. Reese Merrick of Ripple says. A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can
17:14 Speaker 00 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. 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.
17:32 Speaker 01 Games on a break? Don't doom scroll. Try rips on underdog. Buy a digital pack, rip it open and reveal a real physical card. Football, basketball, even Pokemon. Packs start at just $5. Ship it straight to your door or sell it back instantly at full market value. Max value up to $125,000. Download underdog and get in on the chase. Deposit $5, get five free packs. Real rips, real cards, real cash. Only on underdog. Unleash your dog. 18 plus terms apply. Top grails are extremely rare.
18:03 Speaker 05 By the mid 1970s, there was a sense that the whole system was in crisis. Here's a clip of the Treasury Secretary, Bill Simon, in March 1975, laying out the stakes. The basic underlying cause of our inflation has been the mismanagement of the government's spending and monetary policies.
18:21 Speaker 06 And unless we change this basic direction, inflation is going to continue to plague us for a long time to come. Kissinger thinks this is the biggest threat to the world since the Second World War. So he thinks this is like existential risk. And so to some extent, I think they breathe a sigh of relief because of the euro dollar market. I mean, a lot of the pieces are in place. They have a pretty deep and broad network of banks across multiple countries. The swap lines provides some degree of liquidity support in the event of isolated instances of problems. Right? The key is you don't want amplification spillover, contagion. You want to be able to solve problems locally. And that's what liquidity provision is designed to do. And so you could imagine a world in which they go, well, this is a disaster. But thank God we have euro dollars because otherwise what are we going to do?
19:05 Speaker 06 Because you could do multilateralism and try to find a way to pipe it through the World Bank or the IMF or something like that. But like, that's again, hard. And the easy solution is there.
19:13 Speaker 05 And indeed, the Europeans do want to do multilateralism. They want a public sector solution to this problem. But US policymakers are very wary of that, in part because it's just like Bretton Woods all over again. The US doesn't want to share, and they're experiencing this incredible shock to their economy. We're entering a period of stagflation. And if we can manage the petrodollar recycling in such a way that the oil producers are reinvesting disproportionately in the US, that will help us recover. If we have to spread out that reinvestment across Europe as well, then it's going to mean a weaker outlook on the US economy.
19:57 Speaker 05 And so the US rejects this public sector solution in the hopes that the private sector solution, eurodollar recycling of petrodollars, will actually help the US recover relative to everybody else from the economic shock.
20:12 Speaker 06 Yeah, never let a crisis go to waste, right? So the US sees crisis as an opportunity. The opportunity is twofold. One is the federal government's running deficits. Somebody's got to fund those deficits. These oil-producing countries have all this cash. You know, it'd be a shame if you didn't buy some treasury bonds with that cash. Getting the Saudis to buy more treasuries, that fell to Bill Simon. Simon had just been appointed Treasury Secretary. He succeeded George Shultz, who was a PhD economist from MIT. Shultz had already served in two cabinet-level roles before he joined the Treasury. So he's very experienced, very expert in economic affairs. Bill Simon grew up in New Jersey. He went to Lafayette, and one of his early profiles said he, quote-unquote, "liked partying and sports a bit more than studying." So he wasn't quite the same personality type as an MIT PhD economist.
20:57 Speaker 06 He was actually a bond trader at Solihull Brothers. But he knew Shultz, and Shultz brought him in as deputy secretary, basically to be the chief operating officer of the Treasury Department. But when there's a need for expertise on the energy side, Nixon taps him as the energy czar to respond to the oil shock. And he's immediately not very popular with the Nixon team. They think he doesn't have enough experience with international economics and the International monetary system to really perform that function. But he quickly becomes the mouthpiece for Nixon policy on petrodollar recycling. He's firmly of the belief that private markets, and by private markets, he means commercial banks, and by commercial banks, he means euro-dollar banks, are the best way to keep the money and oil flowing.
21:42 Speaker 06 The thing that was the most critical aspect of this period, keeping that market together without monetary collapse, he thinks private markets do that better than public alternatives. But he also knows the banking system can only handle so much. There's only so much of this maturity transformation that private institutions can really perform. The Eurobanks have been pretty vocal about that from the beginning. So they've been warning since the fall of seventy-three that they can only get so big and provide only so much intermediation before just prudent risk management would dictate that they start turning deposits away. And the Saudis are going to need an alternative. They need a safe investment that's an alternative to euro dollars eventually. So Treasury bonds are arguably the best substitute. Simon just needs to make sure that they can buy those bonds on terms that leave them in a position they feel okay with.
22:27 Speaker 06 They want them confidential. They want a look at the auction pricing. They want certain kinds of special treatment to make them comfortable with this kind of investment. And so there's a secret mission. Bill Simon flies over to Riyadh to try to pitch the Saudis on kind of a sweetheart deal, right? They get to bid on US Treasury bonds at auction, but anonymously. And they don't actually have to be part of the auction. They get what's called an add-on. So after the auction happens, if they like the price, they can have a little more at the price at which the auction clears. They're not competitive bidders. They have an option to participate or not. And so it's pretty attractive, right? You need something. You want to diversify. You don't want to take a lot of risk. Like, US Treasuries seem pretty good under those contexts. And the federal government like would love to sell you US Treasuries.
23:08 Speaker 06 And so, you know, that's the opportunity in part is another buyer and a large buyer so that the recycling gets piped through the federal government as opposed to just the private sector. And the second is, in exchange, Or at least implicitly in exchange, maybe oil is only sold in dollars because in the fall of 73, roughly a quarter of oil was in sterling. So the sterling system still existed to some extent. There was still something of a sterling block and it was still an international currency in some context and one of them was global commodities. And so, you know, on the one hand, you offer this sweetheart deal with treasury bonds, which is sort of beneficial to both sides. I think that's fair to say. And on the other,
23:48 Speaker 06 you kind of negotiate for a switch in Saudi oil sale policy. And the day after the Saudis agreed to this secret arrangement, they also announced that Saudi oil will only be available for dollars. No more sterling. They actually do this by the Chancellor of the Exchequer in country and he doesn't get a heads up. It's a little awkward. He sort of telegrams back and was like, I have no idea about this. So maybe the communication could have been handled more effectively or less effectively. I'm not sure. But at the end of the day, the US gets their deficit funding. They get a dollar system in oil and, you know, it's still on a nice edge. People are still very worried about the ability of the euro-dollar system to accommodate the continued growth because the price keeps going up, right?
24:29 Speaker 06 So the price goes up, the flows get bigger, the banks get more levered and all of a sudden everyone's kind of worried that there is a point at which this is not going to work anymore. And it turns out that point comes a little earlier than most people expected. So that's really in June of 1974, which is only less than a year after the oil shock initially, that you get really the critical event in the history of the euro-dollar market, the history of the global dollar system, which is the collapse of a bank I'm sure very few people have heard of, which is Bankhaus Herschott in Germany. So Bankhaus Herschott is a private bank. It's run by a guy named Ivan Herschott. So it's an eponymous bank. It's run by its owner and he loves speculating in foreign exchange. And one of the, you
25:14 Speaker 06 could call it benefits of the Nixon shock is in a world of floating exchange rates, you can start to make money trading exchange rates. And so for a while, it's not a huge business for them, but pretty soon, most of their revenue, I believe, was generated by foreign exchange trading. And he sees this as his big moment or something as he writes an autobiography. And he's very excited about the opportunity presented by these trading dynamics.
25:38 Speaker 06 Problem with trading is sometimes you make money and sometimes you don't. And they put a big bet on the dollar that goes sour in June. And they're closed by the German regulators. Now, Hirschdorff has no regrets. He writes an autobiography later called How My Life's Work Was Stolen From Me. So he's perfectly fine with this outcome, but the global economy is not super fine with this outcome.
25:57 Speaker 05 Has a little Dick Ford Lehman Brothers to it.
26:01 Speaker 06 So the problem, among others, is that the Germans come in in the German evening. And if you're very active in foreign exchange markets, you're going to make a mark payment, a Deutschmark payment in German time and at the time, a dollar payment in New York time. The problem is that the German regulators close Hirschdorff before they're able to make their dollar payments. So this is now called Hirschdorff risk, right? Which is probably better known than Bankhaus Hirschdorff. And it's just timing mismatches in transactions and the necessity of lining those up. Otherwise, if somebody goes out of business, they may not make good on one side of the trade, but they will make good on the other. And everybody in New York freaks out, everyone in London freaks out. The foreign exchange market grinds to a halt.
26:41 Speaker 06 There is something like two transactions or something like that in the whole day after this happens. Almost all these transactions happened in New York, by the way. Almost all foreign exchange transactions with a dollar leg are settled in New York. So it affects a lot of trades because, you know, New York time is the one that's affected. And you have a sudden stop to the foreign exchange markets. And that's really scary.
27:02 Speaker 05 And you also have a run in the euro-dollar market and in the money markets more generally. So we've had a decade plus of US policymakers building up this market. Now it's reached a size and scale where a run on it might jeopardize US financial stability more generally. This one bank fails in Europe and the contagion starts to spread onshore in the United States. And there's one bank in particular that gets caught up right away. And it's this bank called Franklin National Bank.
27:48 Speaker 05 And Franklin National Bank has a bank charter, so it's not a shadow bank.
27:53 Speaker 06 They invented credit cards. They're like a Long Island local bank, right? I mean, they do that business.
27:59 Speaker 05 They were an early promoter of credit cards. You know, they are pushing the envelope type of bank. And they are a chartered bank, but they are getting involved in shadow banking type funding sources. And so you can run your bank with just deposits on your right hand side. That's the normal way to do it. But over the last 10 plus years, these deposit alternatives have been proliferating. One is an offshore US dollar deposit. That's what we've been talking about. That's a euro dollar. Another is a repurchase agreement. That can be an onshore or an offshore transaction. And Franklin National Bank is doing both. They're doing both of these.
28:41 Speaker 05 And so they have deposits, but they also have these deposit alternatives that are highly runnable, that are not FDIC insured. And they experience a run. And if you look at their balance sheet over the course of the summer of 1974, it's a run that looks a lot like the run on Lehman Brothers. Their repo counterparties drop away and they have to turn to the Fed for a massive discount window loan. And suddenly the Fed is thrust into the crisis that policymakers have been worrying about for the last several years. The hydro-headed monster is looking to consume the system. And the problem of the euro dollar market overseas has hit the US domestic financial system.
29:27 Speaker 05 And the story is going to have a lot of resonance for anybody who lived through 2008 because it starts in much the same way and it also sort of ends in a similar way.
29:39 Speaker 06 So now it's the summer of 74, things are falling apart. That mood that we talked about, about maybe we should crack down on euro dollars, like that doesn't make sense anymore. And there's a bunch of op-eds that say like explicitly now is not the time to regulate this market. It's precisely the opposite. Deregulate the market, make sure it doesn't fall apart because people are just looking for the next domino, next shoe to drop. And so the world gets together in June, in July, rather, can't really come to a really firm agreement. Wanting to make a firm commitment and by September, like it's very clear that something needs to be done. And so the BIS convenes the group of 10 countries, central bank governors, and they put out a very unusual thing, which is a public statement. And they say, we are here to backstop the euro-dollar market. I'm paraphrasing. We're here to backstop the euro-dollar
30:23 Speaker 06 market, and we are convinced that the means are available to do so. And so that's an implicit reference to the swap lines. And the FOMC and others are sort of aware of the fact that the swap lines are kind of the backbone of that commitment. But what they're really doing is saying, there is a lender of last resort. You all thought there might be, there is, it's us, and we're here to fix the system. And that has a really seismic impact. It really like cures the problem because people are aware of the fact that this announcement effect at its finest, right? This is like whatever it takes for Mario Draghi. It's just the mere fact of the public statement is enough to cure the run. And then it's really off to the races because this market has been identified by the most powerful countries in the world as critical to financial
31:08 Speaker 06 stability and national security. And so the limits on its growth are really pulled back.
31:14 Speaker 05 So I think it's worth saying that the work on understanding what happens in 1974, a lot of archival work was done by Ben Braun and his co-authors Ari Kromp and Stephen Moraw, and they call this communique, the original whatever it takes moment. The original sort of central bank response to a run where the central bank basically implicitly commits to use its money printing ability to stop the run-like behavior. And that's an incredibly powerful tool that central banks have because they can print money, they can make good on
31:52 Speaker 05 everybody's money-denominated obligations. And in 74, you have this critical moment where the central banks, especially the US central bank,
32:06 Speaker 05 commits itself to this sort of policy. Remember, in the 1930s, that's not the attitude of the Federal Reserve. And over a third of the banking system closes its doors. In 1974, you have the Federal Reserve essentially committing to support the banking systems of European countries that are doing a dollar banking business without following any of the rules that govern the dollar banking business domestically. And that puts out this fire. And 2008 is just, in many ways, a repeat of 1974, where it's not clear, is the US going to do whatever it takes?
32:47 Speaker 05 And eventually, that is made clear, and the fires ultimately subside. And we still sort of live in this world where there are lots of runnable money claims in the monetary system. And there's always a question about the extent to which the central bank is there standing behind them.
33:10 Speaker 06 So if this was a movie, this would be the point where you have the contemplative music and the like, what happens to all the characters in the movie? And so in this one, there's really only one character that's really important, and that's the euro-dollar market. And so, you know, just for a sense of scale, by the mid 80s, there are more euro dollars than dollars, which is kind of a remarkable fact. By the mid 2000s, there's much more, 150%, 170%, depends on how you count them. So the euro-dollar market becomes, in some sense, the dollar market. It becomes the much larger, more important, more globalized market that like, keeps the whole system running.
33:43 Speaker 05 This is why everybody uses LIBOR as a measure of interest rates.
33:49 Speaker 06 Used to use LIBOR.
33:50 Speaker 05 The London interbank offer rate is the euro-dollar market interest rate. We don't actually look to the federal funds rate, because the real rate that mattered in the market, once more dollars were being created offshore, was the offshore dollar rate, LIBOR. And so LIBOR is perhaps the best sort of known symbol of the euro-dollar market. And by the The time you get to 2008, the whole system is key to the rates in this offshore dollar market as opposed to the rates in the onshore market that the US banking system was sort of developed around.
34:30 Speaker 06 Yeah, so global trade settled in euro dollars. Euro dollars are a huge asset people have. So in a sense, it's both the backbone and the lifeblood in the body analogy, right? It's the lifeblood and the backbone of the whole global dollar system. It still is in a lot of ways. And in the Contemplative Music overlay version of the program, like you could say, it all really goes back to the 60s. And so we're left with this remnant of Cold War competition that in some sense was antithetical to US monetary sovereignty, but served a very particular purpose at the time. And it's really a lesson in how, for lack of a better word, you know, decisions have consequences and how financial systems evolve in unexpected ways.
35:12 Speaker 06 And particularly when the government supports something, it gets a lot of room to grow and run. And it's very hard to predict what comes next. And so, you know, it does all start in Yugoslavia, but it becomes obviously a much, much bigger thing over the subsequent 50 years. So, you know, we're recording this on the 50th anniversary roughly of the intervention, the communique, to stall the run on the euro dollar market in 1974. And so like, it's a time for reflection in a sense. But I think more importantly, it's just a really compelling story. It's A, the how we got where we are, which is a question I think we don't ask enough. And B, like the real sort of underlying reasons why systems evolved in the way that they did, which can tell us a lot about the future as well.
36:01 Tracy Alloway? Oh, look, we're free. We're out of the bunker, or the vault, or the archive, or whatever this is/was.
36:08 Joe Weisenthal? Is the story over?
36:10 Tracy Alloway? I guess it is. All good things must come to an end. I feel like I learned a lot. I love these historical deep dives and Lev and Josh really dove deep for this one.
36:22 Joe Weisenthal? Actually, like honestly, that was unreal. I mean, just the fact that we got to listen to them talk for that long about this really intense historical work. I'm actually going to miss hearing about Eurodollar history, for real.
36:35 Tracy Alloway? Yeah, me too. The good news on that front is we are not quite done. Josh and Lev, they've walked us through the history, so we have a much better sense of where Eurodollars come from and the problems they were intended to solve. But I think there's still a lot of open questions about the Eurodollar market's role today and also how it fits into the ongoing debate about the future of the US dollar.
36:58 Joe Weisenthal? Totally. There's like a lot of discussion still about whether the dollar can maintain its special reserve currency status. People love to talk about that. Whether it can maintain its status within the financial system. And Eurodollars, as we learned from this series, are one of the most important types of dollars out there. They facilitate global trade and investment liquidity and all that stuff. So all of these debates that everyone is having all around, they sort of come back to this area.
37:23 Tracy Alloway? Yeah, so we definitely need to talk more about the future of the Eurodollar market and by extension, the future of the dollar system. And to do that, we are going to bring back Lev later this week in an episode of Lots More to talk about all of that. So definitely look out for Lots More with Lev on Eurodollars. But for now, this is the end of our historic look back at this market. We hope you enjoyed listening to Josh and Lev as much as we did.
37:52 Speaker 06 I also just want to thank a bunch of folks at various archives, because a lot of this work was based on primary sources and dusty books and forums and things like that. So definitely, at the New York Fed, the archivists there have been extraordinarily helpful. The Bank for National Sentiments in Basel, the JFK Library and the LBJ Library, who have been super kind to provide stuff. Columbia has the Clearinghouse Archives, which we've had a chance to go through, and the National Archives in general. Just a big thanks to all of them.
38:16 Tracy Alloway? Shall we leave it there?
38:17 Joe Weisenthal? Let's leave it there.
38:17 Tracy Alloway? This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
38:23 Joe Weisenthal? And I'm Joe Weisenthal. You can follow me at theStalwart. Follow one of our special guests, Lev Manand. He's at Lev Manand. Our other special guest, Josh Younger. He's not on Twitter. Thanks to our producers, Kerwin Rodriguez, at Kerwin Armin, Dashell Bennett, at Dashbot, and Kail Brooks, at Kail 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.
38:56 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.
39:49 Speaker 01 Underdog already has team picks, player props, money lines, spreads, you name it, they got it. But apparently, somebody over there said, "You know what's missing? Screaming like a maniac about a rookie card on your couch." And we love them for that. Because Underdog now has rips. You get a digital pack, starting at just $5. You check the live odds, see which grails you could pull, then rip it open to reveal a real, physical card. And the grails are no joke. They have cards up to $125,000 in value, and plenty to pull. From football and basketball to Pokémon, with new limited edition packs dropping regularly. Even cooler, you can decide... decide to keep the card, an Underdog will ship it straight to your home. Or sell it back instantly at 100% of its fair market value. And the cash goes right in your account.
40:34 Speaker 01 No listing it online, no stranger lowballing you in the messages. Just rip, reveal, and cash out instantly. Or make some room on your shelf. Download Underdog and get in on the chase. Get five free rips packs when you deposit $5. Real rips, real cards, real cash. Only on Underdog. Unleash your dog. 18+, terms apply. Top grails are extremely rare.
Previous The Hidden History of Eurodollars, Part 2: Defending the Dollar System Next Lots More with Lev Menand on the Eurodollar Market Now Page updated November 5, 2026 · transcript and summary are machine-generated
