Odd Lots The Hidden History of Eurodollars, Part 1: Cold War Origins
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Jan 14, 2025 Lev Menand, a Columbia Law professor, and Josh Younger, a policy advisor at the Federal Reserve Bank of New York, explore the intricate world of eurodollars. They dive into the origins of this $10 trillion market, tracing its roots to post-World War II Europe amidst Cold War tensions. The discussion reveals how geopolitical dynamics shaped the eurodollar's development, the role of eurobanks in trade across the Iron Curtain, and London's emergence as a financial hub. This unique market highlights the complexities of shadow banking and its impact on global finance.
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Eurodollar Origin
- Eurodollars originated in Yugoslavia when Marshall Tito demanded gold back from the US, sparking Soviet fears of asset freezes.
- The Soviets, seeking a safe haven for their dollars, deposited them in communist-sympathizing European banks, primarily in Paris.
Risk and Security
- Soviet deposits in French banks weren't equivalent to US bank deposits due to lacking US government backing and Federal Reserve access.
- This highlighted the risk Soviets took for security, accepting higher risk for their dollar deposits to evade potential US sanctions.
Early Eurodollar Business
- Early Eurodollar banks profited from financing East-West trade using dollar deposits, avoiding foreign exchange risk.
- This profitable business, while initially small, laid the groundwork for the Eurodollar market's expansion.