In Some Ways, It Has Always Been Forward

There is certainly not enough attention paid to the evolution of eurodollars and even less devoted to how it all started. In my analysis, those two facets are inseparable as the origins of the eurodollar space tell us a lot about how and why it became what it is. The Japanese, for instance, were being squeezed by really unrelated funding pressures in 1963 that began in Italy, worked through Switzerland and ended up with the Japanese government actually selling US Treasuries to fund what was among the first problems with the “dollar short.” In many ways, things have never changed even if the format has and complexities greatly proliferated.

According to some theories, the start of the eurodollar (or a strand of it) can be traced back to one British outfit – Midland Bank. The context was the middle 1950’s and it has to be understood the systemic nature of sterling at that moment in history. For several reasons, British monetary policy was exceedingly “tight” and not just in the normal central bank interest rate scheme. The Chancellor of the Exchequer in 1957 even went so far as to prohibit the pound from financing trade between parties unrelated at all to the British currency – the very essence of what a reserve currency is supposed to do. In other words, with sterling already in crisis, UK authorities banned foreign counterparties from using the pound to facilitate exchange between two (or more) non-sterling currencies. Unless the ultimate transaction was settled in pounds at the start or at the end, banks were supposed to turn away the business.

That opened the door for some other medium of exchange that could be both very flexible and less susceptible to such interference, and given that there was only one other candidate (gold being increasingly disfavored in this context despite the lip service of Bretton Woods) it was only a matter of time before dollars would fill the gap. US monetary and government officials, however, were not particularly enthusiastic over the possibility as it would mean further pressure on the US current account – dollars would have to flow overseas in order to build up enough “gravity” to act as fluid global agent of exchange. That was already the case in certain money centers where US dollar trade had already been taken up, but even as late as the 1950’s there was still an enormous proportion of global geography conducting trade in sterling that would need transition.