Offshore Dollar Funding: Eurodollars

Ever since World War II concluded, a one-of-a-kind monetary paradigm has been expanding and strengthening deep in the shadows of global finance: the Eurodollar system. Decades after its inception, it’s still difficult to envision how this enormous market operates.

The most common origin story of the Eurodollar is that, in the early post-war era, America’s adversaries needed a place to store dollars outside the U.S. banking system to avoid unexpected seizures. Another version is that around the same period, global financiers discovered a way to profit from regulatory arbitrage by lending U.S. dollars overseas. Both accounts are accurate, yet the Eurodollar could only emerge out of America’s post-WWII “global security pact” (roughly pictured above).

Following World War II, the U.S. by default became the dominant global superpower. But rather than choosing to conquer the world, the Americans instead convinced almost every major power to partake in a global “de-arming”: unobstructed trade on an international scale, with the U.S. providing the armed personnel to subdue (almost all) major conflict. This facilitated the most prosperous period in human history and the rise of the first truly global geopolitical currency: the U.S. dollar.

Under America’s security pact, the financial giants of the world took advantage. The major American banks set up branches not just in London — which grew to become the epicenter of Eurodollar activity — but globally. Foreign banks likewise set up operations in New York. This, combined with a prolonged period of heightened peace, not only gave rise to the most stable reserve currency on record. Financial behemoths had created the global dollar funding complex, featuring over 25 different types of dollar-denominated instruments, from FX swaps to repos.

The global dollar funding complex provided dollars to anyone within America’s global security pact, but especially to those outside America’s borders.

Introducing: the Eurodollar system.

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