Eurodollars
US dollars held and lent outside the United States, an unregulated offshore money system that grew larger than the onshore one and that nobody planned.
A eurodollar is a US dollar deposit held at a bank outside the United States. The prefix is a historical accident and has nothing to do with the euro currency, which arrived four decades later; a dollar deposit in Singapore or the Cayman Islands is still called a eurodollar.
The concept sounds like an accounting curiosity. It is one of the most consequential structures in modern finance, because it means that most dollars in the world are created and lent by institutions the United States does not regulate and cannot directly control.
Where it came from
The origin story is too good to be entirely apocryphal, and the documentary evidence largely supports it. In the early Cold War, the Soviet Union and China held dollars from trade and had an obvious problem: dollars held in New York could be frozen or seized by Washington at any moment. So they moved them to European banks willing to hold dollar accounts, notably the Soviet-owned Banque Commerciale pour l'Europe du Nord in Paris, whose telex address was Eurobank.
That was the seed. What made it a market was American regulation. Regulation Q capped the interest US banks could pay on deposits, so anyone with dollars could earn more offshore. Then in 1963 the Interest Equalization Tax, designed to stop capital leaving the United States, made it expensive for foreigners to borrow in New York, so they borrowed in London instead. Britain, having lost an empire and looking for a role for the City, deliberately declined to regulate dollar business conducted in London by foreign banks.
Every rule intended to keep dollar business inside the United States pushed it offshore. By the 1970s recycled oil revenue, the petrodollar surpluses of Gulf producers, flooded into the same market and was lent onward to developing countries, which is how the Latin American debt crisis of the 1980s was financed.
Why it matters
Three consequences.
The first is that the offshore market has no lender of last resort. A bank in London with dollar liabilities and dollar assets cannot go to the Bank of England for dollars in a panic, because the Bank of England cannot print them. It has to find them in the market, and in a crisis the market is exactly where they are not.
The second is that this is the pipe through which the world actually uses the dollar. Trade invoicing, commodity pricing, and corporate borrowing across emerging markets all run in offshore dollars, which is why a country with no particular connection to the United States can have its whole financial system convulsed by decisions taken in Washington.
The third follows: the Federal Reserve has become the offshore system's central bank whether or not it wants the job. In 2008 and again in March 2020, the crisis was in large part a scramble for dollars by foreign banks, and the Fed resolved it by opening swap lines with other central banks, effectively lending dollars to the world. That is a monetary policy decision for the planet made by an institution accountable to one country's legislature.
The echo
The eurodollar system is the practical machinery behind what people mean by dollar dominance. It is not primarily about US exports or even about reserves at central banks; it is about the fact that the world's private credit is denominated in a currency only one country issues.
It also explains why de-dollarization is so much harder than it sounds. Countries irritated by American sanctions can settle bilateral trade in other currencies, and a growing number do. What they cannot easily replicate is a deep, liquid, globally accepted offshore funding market with an implicit backstop, built accidentally over seventy years by regulators trying to accomplish the opposite.
The system that began with Moscow moving its dollars beyond Washington's reach ended up making almost everyone dependent on Washington's reach, which is as neat an irony as international finance offers.