Bloomberg Audio Studios, podcasts, radio news Tracy, Are we still doing this? It seems like it Actually what is this supposed to be? Is this a Cold war bunker or something like that.
That's a good question. Maybe it's a vault or the vienna sewage system like in the Third Band. Do you remember that that was a good movie?
I should see that, Okay, But in this episode we've moved on from the immediate post war period. We are now in the nineteen sixties, a turbulent time for society and politics, but also for euro dollars, which are the subject of our special series.
Yep.
This is the second installment of our three part history of euro dollars. If you haven't listened to our first episode, you should definitely go back and find it. We have been tracing the origins of this very particular and special form of money to better understand how it came to be and what it actually does. And our first episode looked at the creation of euro dollars and they're perhaps unexpected communist connections.
Yep, that's right. And now we're going to turn the page new decade, a new chapter in euro dollar's existence.
There's something else new that happens right around this time. So dollar swap lines get created. Do you remember those, Joe.
I've read about them in that Adam Two's book crashed, But yes, they were big in two thousand and eight, then again in twenty twenty, also the Eurozone crisis. They're basically something that no one ever talks or thinks about outside of a crisis.
Yeah, I think that's right. So they are dollar borrowing lines for other central banks. And I've seen swap lines described as the international lender of last resort. They tend to, as you mentioned, get tapped during big emergencies. That's when we hear about them. But swap lines basically allow central banks to exchange currencies, and in this case it is all about getting dollars.
And as a reminder, our storytellers for these episodes are lovemanand and Josh Younger.
I'm levmanand I'm a law professor at Columbia Law School, where I study money and banking and the history of central banking.
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.
When we left off, we were at the end of the nineteen fifties, the euro dollar market was just a billion dollars or so. But it's grown from pretty much nothing, and so it's starting to attract more attention from policymakers at central banks. And now as we enter the nineteen sixties, euro dollars are even going to hit mainstream politics.
Let's take a listen.
So now it's the fall of nineteen sixty, Kenny's run for president, a very tight race against Vice President Richard Nixon, and in the background, the monetary system is in crisis and it's really showing signs not just to fatigue, but of potential collapse. And so to understand why that could happen, like, what does that even mean, especially in the context of the nineteen sixties, we kind of have to go back
to the war. So it's nineteen forty four now, and forty four countries are convening in Bretton Woods, New Hampshire. Small town, big hotel. They took up most of it. It's about seven hundred people. And the whole premise of this is to find a way to restructure the global economic and monetary system after the war's officer. It's still a presumptuous right, the wars not ever yet, but they're
still planning ahead. And so you know, we hear a lot about Yelton, Potsdam and the big conferences about the partition of Europe and Berlin and so forth, But this is really among the most important of these postwar planning conferences. It's the brainchild of Harry Dexter White, who most people haven't heard of as well. He's been the Treasury since
the mid thirties. He's a PhD economist, doesn't really like what ends up for teaching, and Milton Friedman's professor recruits him to go to the Treasury to work from Morgan thou who's FDRs very long serving Treasury Secretary. I think he's the second longest serving after Gallaton, who is Jefferson's secretary. So he has the job for like twelve years, which is a long time to be a Treasury secretary. And
there's really two competing visions going into this conference. The first is the American vision, which is a dollar based global monetary order in which gold forms the foundation. So your dollars are convertible into gold. All and currencies, at least among the victors are fixed in their exchange rates, so pegged to the dollar, and so everything kind of revolves around the US dollar and the gold stock that the US has accumulated over the course of the war.
The US is two thirds of global gold reserves at this point, so it's monetary gold reserve. So they have a lot of let's say, leverage going into this conference, and they know it. And that's been a dream of White since basically joined the Treasury. He's been pushing for a global dollar system. He really wants the dollar to retake its prior position. Remember in the twenties, the dollar was the global reserve currency, was the currency of trade. It lost that status over the thirties on a series
of runs on the dollars. So he's very familiar with what happens when this breaks down, and he wants to bring the dollar back. This is the second bite at the apple, and so he wants the dollar to be part of global trade. He wants to be the unit of account. He actually wants all the invaded territories to use the dollar. So he wants invasion currency to be printed by the Treasury they called yellow seal dollars, So he wants dollars everywhere in cleaning North Africa, Germany, et cetera,
and actually do that in some places. And the British, on the other hand, are very aware of this, in large part because they don't have any gold and so they have no leverage. But they're worried that the US will come out of this conference with way too much global power, especially relative to the European allies, and John Mayner Kain's is their champion. He comes up with an alternative arrange because a bank ORP, which is a contraction
of bunkin or in French. I promised earlier I wouldn't do French words, so I apologized with the accent, but you know it's bank gold. Which is the idea is there is no global currency issued by one country. There's only a transnational credit organization kind of like a bank, where international trade happens on the books of that organization.
So it's something like a transnational central bank, and it involves everyone giving up their sovereignty to some extent to facilitate global trade in what he considered sort of a fair and less arbitrary way. Meanwhile, White is very aware of the potential sacrifice of sovereignty to use the dollars of global reserve currency in the global unit of trade.
It's just he would prefer everyone else to sacrifice their sovereignty rather than the US, and so in the end, basically the US wins, and they win because Lionel Robbins is one of the UK delegation. This is in Ben Steele's book. He basically says, we needed the cash right, so they don't have a lot of leverage. This is a power grab by the US.
The US is by far the biggest economy in the world, it has the prevailing military in the world, and there's an opportunity here for real internationalism and cooperation around global trade and the monetary system that facilitates it, and the US rejects that and essentially imposes an alternative system that puts the US much more in the driver's seat and everybody else in a more subordinate position.
It's also there's a lot of very human elgiment this, Like by the end of the Brettonwoods conference it's three weeks long. No one thought it would go that long. They're tired they're hungover. They went through a lot of liquor at this conference. There's no food left at the hotel, and so like everyone just kind of wants to go home. Now, that's not a great reason to sign the world over to the US as a dollar centric universe, but there really is like a human elements how all of this
goes down. That's kind of one of the themes through this whole story.
And multilateralism is hard, and there are a lot of frictions to get countries to cooperate on really really high stakes issues for their domestic economies. And we'll see in the course of this story how cooperation often breaks down and shortcuts prevail over longer term, higher cost solutions to problems.
So the Brentwood system is one in which for thirty five dollars you can have an ounce of gold from the treasury and specifically foreign central banks. You have to be an official institution that you know, I couldn't get thirty five dollars for gold, but the Bunk de France could. And so the US isn't a sense of the world's banker because they're issuing dollars and they can in principle issue more dollars than they have gold. So it's not
a fully reserved system. There's leverage embedded in the international system, and so that happens pretty quickly because global trade expands and the US monetary gold stock is not increasing. Actually most of the gold production is in Russia, so they're not giving it over so easy, and so over time the world needs more and more dollars and the value of those dollars implicitly starts to decline. Now, what does that mean in the context of a peg from the treasury.
If the treasure will always buy your dollars for renounce of gold for thirty five dollars, what does it mean for the value the dollar to go down? Well, that's not the only gold market in town, and soon on the continent, and in London at the Metal exchange, it costs a little more than thirty five dollars to buy an ounce of gold, and that's really consequences of non monetary demand. So you have some speculators. A huge fraction of gold in the world is held up in jewelry
like that's the real thing. So you know, there's reasons you would want gold other than to back your currency. I think it's fair to say, and there are more and more of those reasons and more and more demand for those purposes over time. And so this introduces a fundamental instability into the breton Wood system, because if a foreign central bank is exporting to the US, the US is running a balance of payments deficit. That means they're
importing more than they are exporting. Dollars are piling up in Europe. Those dollars can in principle be exchanged for gold at thirty five dollars an ounce. That gold can be sold for thirty five dollars and fifteen cents an ounce in London, and sometimes much more than that. And so slowly at first, then all at once, so to speak, the US gold stock starts to decline at the same
time as their dollar liabilities are going up. So now you owe more gold in principle to more people, but you have less of it with which to pay them. That's a bank run, or at least a slow motion bank run, and so people get really worried that this is going to just accelerate, and they need some way essentially the staunch of the bleeding. So you know, you have a couple of options, and I should say this becomes an election issue in Kennedy Nixon. I mean it
comes up in the third debate. There's a big shock to the price of gold in October of nineteen sixty, where the price goes to forty dollars ounce, which is kind of insane if you can buy it from the treasury at thirty five. It kind of sticks there for a little while, and so Nixon is out there saying, well, Kennedy's going to blow up the dollar.
Mister Vice President.
In the past three years, there has been an exodus of more than four billion dollars of gold from the United States, apparently for two reasons, because exports have slumped and having covered imports, and because of increased American investments abroad. If you were a president, how would you go about stopping this departure of gold from our shores? All, mister Vrongfrand the first thing we have to do is to
continue to keep confidence abroad in the American dollar. That means that we must continue to have a balanced budget here at home in every possible circumstance that we can, because the moment that we have loss of confidence in our own physical policies at home, it results in gold glowing up.
And he initially kind of brushes it off. He says, oh, I guess sick Nickson thinks I can trade gold in London, Like that's hilarious. And eventually this advice is like, you have to actually address this. People are really worried that your policies are going to lead to a collapse of the dollar. And so he puts out a formal statement
as a candidate pledging his support for the dollar. So this is really becoming an issue of national security, Like people associate the dollar with the core of NATO in the free world, and Eisenhower is pretty explicit on this point. Kennedy's pretty explicit on this point. I mean, the collapse of the dollar is like not an acceptable outcome because it really reflects a collapse of the anti communist alliance
that's developed in the past ten years. So it's kind of core to the US's sense of itself that the world remain on a dollar standard, that the dollar remains strong.
Part of what's gone wrong here is Harry Dexter White, in crafting this new system that puts the dollar at the center, has given something up to everybody else, and that's the peg of the dollar to gold at thirty five dollars announced and the power that is given up by the US to all those foreign central banks to allow them to withdraw gold at that exchange rate. And at the time that this is done, the US has
so much gold stock. But what has happened is we have recreated nineteenth century conditions by essentially bringing back a gold standard and the rigidity that goes with it and the run ability on the currency that goes with it. We're not used to the idea of running on the currency in the United States today, but that was a problem that countries experienced a lot when they had convertibility
to gold. And so we're in the post war world here and we have brought back convertibility to gold, all the risks that go with it, and the rigidity that goes with it because we no longer have the ability to control the elasticity of the money. So apply there's this sort of bomb built into the system where if everybody decides to redeem all at once, the money supply is going to start contracting rapidly. They're going to have
a crisis of confidence. And so here we are in nineteen sixty in some sense at the apex of US power, confronting the possibility that we could be in nineteen thirty two all over again with a series of withdrawals and the US dollar breaking the peg, and that comes to take on this great significance the idea that we won't be able to maintain the peg. Of course, from an optimal design perspective, you really want to be able to adjust that peg. But you've said it's going to be
thirty five dollars. And now suddenly, in the Cold War world, in global politics and even in domestic politics, this idea of the dollar maintaining its value takes on this grit sense of significance, and increasingly US policy makers are in a bye.
So in a speech to the IMF in September of nineteen sixty two, Kennedy is very clear on this point that the dollar, the importance of the dollar in the fight against communism, is critical to his administration.
The security of the dollar, therefore, he is, and ought to be of major concern to every nation here. To undermine the strength of the dollar would undermine the strength of the free world. We are taking every prudent step to maintain the strength of the dollar to improve our balance of payments and to back up the dollar by expanding the growth of our economy. We are pledged to keep the dollar fully convertible in a goal and to back that pledge with all our resources of gold and credit.
This is the thing. You can fix the problem one of two ways. You can change the peg slash change the system, or you can find ways to reinforce it through sort of makeshift measures. These are the shortcuts, right, And so you know Kennedy thinks this issue is public enemy number two. Number one is nuclear war. Number two is the stability of the dollar. He actually tells Ours Lessenger this of the course of the campaign and then into his early presidency, and so questions how do you
do it? So among those two options, he commissions a test force. He's elected. He turns to Adelai Stephen Center, and he says, what do I need to focus on? And Stevenson says, definitely the dollar. In fact, this whole system isn't working, so we probably want to think about a new one. And Kennedy doesn't like that answer. Because Kennedy is sensitive to a lot of different things. One
is he's portrayed his young and inexperience. There's actually memos in the campaign about how to deal with the youth and inexperienced issue, and so he's very sensitive to any sense that he's not up to the job. And he tells his advisors, if this thing falls apart's gonna be on me, right, And so he doesn't like that. Generically, he's also like fundamentally an institutionalist. He doesn't love the idea of dramatic change.
He doesn't like taking those risks, and so he basically doesn't like what Stevenson and George Ball have to say. So he says, I want a new report. So he gets Alan Sprule, who's the outgoing I think he'd left a couple of years earlier president of the New York Fed, to write a different report. And that new report says, don't mess with it. It's probably fine, it's not a crisis. The public's impressions are wrong, but you need to address this forcefully, but you know, don't do anything drastic, and
so he basically takes that to heart. Implicitly, the question is who's going to execute on this.
And you think about this from the perspective of Kennedy, who's just been put into this very difficult job. And his advisors come to him and say, actually, we have an international monetary system with a basic flaw in it, which is the dollars pegged a gold at thirty five dollars announce and it's ultimately going to have to break that peg. This system doesn't work. We should do something else. You're like, is there some way to keep the thing going?
And that's what leads the second report, and that's what leads to the growth of the euro dollar market, because it turns out that the way to keep the thing going is to develop this offshore dollar alternative.
So now we can meet some actual characters in this story. So there's the Treasury team that comes in with Kennedy is head by at least with respect to this issue. Is two people in particular. One's Douglas Dylon of Dylan Reid.
His father founded Dylan Reid. He's one of the wealthiest people in the United States, the former ambassador to France, and he was selected in part because he owned a vineyard Oprion actually, so a very well known vineyard in Bordeaux, so he had French roots sort of and does a
good job. He's put at State. He's a contender for Secretary of State when Dulles leaves, he ultimately doesn't get the job, but Kennedy wants to put some own at Treasury who has a good business reputation, who is well respected, has government experience, and people generally like this guy. He's like seen as one of those consummate bureaucrats who's like sharp and thoughtful and a good listener and clear in all of these things, and so he brings with him Bob.
Bob russis from the New York FED. He actually served in the Second Worl War under Charlie Kindelberger. Charlie Kinderburger is the father in some sense of the idea of the dollar as a key currency, or at least a big proponent of it. But they were doing strategic bombing targets together. Kinderberger was his commanding officer, so he had some connections to this idea through his wartime experience of a global dollar system. And their bias, both of them
is to reinforce the existing system. They kind of want to find a way to save the Bretonwoods arrangement. So here's Bob russa looking back from a few years later.
We got them to recognize after the big flurry at camera had October twentieth, nineteen sixty four, when the market went.
Up to a forty dollars price.
That time that was looked at it was quite a threat to the stability as a monetary gold price and got them alarmed. And so after that, when it was clear, particularly by the time President Kennedy came in and made it firm that we were going to continue to support thirty five dollars price, and then the London price began coming down, it was fairly easy to persuade these other countries that you know, we ought to be together in this because as gold comes back.
Into the market.
Now we the United States don't want to have to just have it appear that we're always taking all the gold out.
Putting it in sometimes two.
Of course, but why don't we share this as a buying pool when it comes into the market at thirty five Then we won't be in there bidding against each other. It will be an orderly arrangement, would be a little bit of like a cartel, but in the interests of the world monetary system.
On the other side, you have Walter Heller. Walter Heller is the chair of the Council of Economic Advisors. Kenny's trying to balance out Dylan's like somewhat conservative eisenhowerd administration reputation with someone who's much more on the New Deal liberal side of things, and The New York Times calls him a prototype of the liberal economists. He's very well known for his tax policy views, and he often talks in terms of human flourishing, Right, we should adjust the
tax god to promote human flourishing. And he brings with him Jim Tobin, who is a very well respected economist. He won the James Big Clark Medal, which is kind of like a Nobel prize ish thing in fifty five, so he's very very well established, and he comes in as one of the economists on the council, and in
particular the one task with international issues. And so they think this whole thing is flawed from the start, and they're pushed to the President elect, and eventually the president is to do something brand new and think about all kinds of different arrangements. Heller sends out, it's han of memos, that kind of list. He says he does it with Russa, but it's clear, like who's who in this and it
turns into a pretty contentious argument. I mean, there's actually in the Kennedy Library archives, they have little political cartoons the Deputy National Security Advisor Drew making fun of Bob Russa and like all this stuff he's trying to do at the same time, and in some of these memos that kind of derogatory, like no one really believes what this guy is writing. So there's a lot of tension between the Treasury and the White House.
Kennedy appoints Dylan, who is a prominent member of the opposing political party. So here we have this new democratic administration coming in and one of the most important cabinet posts goes to a very wealthy Wall Street scion from the other political party. And so the battle within the administration is also for the future of financial policy in the Democratic Party, where you have the New Deal liberals
the FDR crew fighting this basically interloper. Who's Dylan losing Because time and again, as Kennedy himself notes, Dylan thwarts the new deoliberal economists in the administration, and Dylan is the one who ultimately crafts the policy of the administration and the policy that comes to dominate Democratic administrations that succeed Kennedy as well. And so this is a very important turning point in how the executive branch in democratic
administrations approaches financial policy. And it's no longer the FDR vision that is in the driver's seat.
And ultimately, every time they're pitted against each other, the treasure basically wins those arguments because the Treasury's advocating stability and the CEA the Council of Economic Advisors, is advocating upheaval. Now maybe productive upheople but something very dramatic, and so Kennedy really is predisposed to go with the upheaval side of things, and they keep it up. Ultimately, he wants to reinforce the existing system. So the question is how do they do that. How do euro dollars come in?
So the first thing they do is they try to figure out what year dollars can do for them. And the key here is to keep a global dollar system, but to have it all offshore because one of the big problems with the balance of payments is that Americans are investing overseas, which means pushing dollars out of the US and taking in financial assets. So the dollars are leaving, financial assets are coming in, and that's a big source of the flood of dollars into Europe and the risk
that those dollars will then be turned into gold. And so you basically want to push all of that activity. All those foreign corporations that want to borrow dollars, don't borrow them in New York, borrow them in London. And there's two ways to do that. One is you can provide incentives to push that activity off shore. They do that using the tax code. And the second is to make the euro banks, the year dollar issuing banks, more
attractive to potential investors they can row their business. Because if you want to take US financial activity push it off shore, you need to make sure the euro dollar system can accept it, can grow to accommodate a much higher volume of transactions. And whenever banks take on more liabilities, which is the same as taking in deposits, the risk of a run grows. And so this is where people become very acutely aware of the risk that leve talked about it, which is in the US, if you have
liquidity problems, you can go to the FED. In Europe, if you have dollar liquidity problems, there's nowhere to go.
The goal here is not to get US financial activity offshore for its own sake. The goal is very much to stop holders of dollars, especially foreign central banks, from going to the gold window at the US Treasury and draining our increasingly shrinking gold reserves. And so this is a sort of a two step move. We're going to have new investment opportunities so that you don't want to go and withdraw the gold, so that you hold your dollar balances offshore. We're going to build up this market.
It's going to be what they call the outer defenses of essentially the Breton Woods International Monetary System.
It's basically a SPRUL advocates and this report it's all about confidence, right, so we don't actually need to provide anything other than assurances that someone's going to have their back, because this is always a concern when the your dollar market was growing, is that you know who's going to solve the problem of liquidity if everyone goes to their eurobank at the same time. And so what Dylan and
Russa come up with is the swap lines. Now, the swap lines are initially from the Exchange Stabilization Fund, which created in the thirties just intervene in foreign exchange markets. So it allows the US government to buy foreign currency. Buying foreign currency is the same as giving other people dollars, right, you're just saying I need something in return. It might
as well be Stirling or Franks or something like that. Now, the problem for Dylan Russa is the ESF is what's called the funded vehicle, meaning it only has so much money, and by the early sixties they've made a bunch of commitments to Latin American countries that basically mean there's no gunpowder left and the resources they have at their disposals through the ESF, which is controlled by the Treasury, are minimal. But guess who has essentially infinite resources when it comes
to printing money is the central bank. And so they want to be able to intervene in foreign exchange markets, which is a different word for lending dollars to foreign central banks that could then lend them to Euro dollar issues. And so if a eurobank comes into trouble, which they will do with some frequency throughout the sixties, they go to their central bank and say I need dollars. That central bank goes to the FED in this case and say I need dollars and so you can lend those
dollars that effectively backstop non US banks. So they do it through swap transaction. But that's just the way they structure it. The question is is the FED comfortable with this because they had done some foreign exchange transactions in the past, but it wasn't really a core part of what they did previously, and they didn't have a standing authorization to do what are called open market operations and
foreign currencies. So these swaps are a new kind of open market operation that the committee, the FMC, the Federal Open Market Committee, needs to decide is legal, authorized, is within their mandate, is something they're comfortable with from the policy perspective. And Bill Martin is the chair of the FED. He's been the chair for a while at this point. He's actually the Treasury negotiator for the Federal Reserve Treasury Accord that deepegs the bond market after the Second World War,
so he's he's been around DC a lot. He's a very well known character. He's a very powerful chairman, and he is sort of, at least based on some of the oral interviews that are done later with Bob Bruce among others, pretty uncomfortable with this idea, and it's pretty controversial across the committee. Now they don't reject it outright,
but they are wary. But Kennedy and Dylan and russ are pretty adamant that this sort of has to happen, and they put a lot of pressure on Martin, and eventually they offer Treasures General Counsel to author an opinion saying this is legally authorized. And then they get Bobby Kennedy, which the FED didn't ask for it, to write an opinion saying this is legally authorized, so they can have something in their back pocket when Congress asks questions, and
Congress does ask questions pretty quickly. In one of his oral history interviews, Russa remembers the debate and the fed's concerns, in particular getting.
The swap started. There were two problems.
Of course, other countries were suspicious of that too, didn't know quite what we had in mind.
And incidentally, I.
Had to research the existing legislation very carefully, but I discovered that we didn't need laws. I could go ahead and do it under president legislation. I had to get a ruling in the General Council. The Fell Reserve was very suspicious and reluctant. It's a big body, people from all over the country, and you can't sit down and explain it all to them all at once and expected to go across. So I figured, and Dylan certain agreed with this.
What we had to do was prove it to him.
What we had to do there with the FED was was get going by having the New York Fed through Coombs, arrange a swap line with this bank or.
That central bank using Treasury money.
The Treasury didn't have very much money, and the Stabilization Fund at that time and free money, we had less than three hundred million dollars. But I did a little bit of double counting. I'd make a deal with Germany for one hundred minion, and France for fifty, England for fifty million, and maybe added up to four or five hundred million, always assuming I never have.
To use them all at once.
I got up to a million by the end of the first year, and we had used it a little by that time, not for the US but for the British, and it had proved itself enough so that we could then go to the Federal Reserve and say, look, this is a perfectly workable arrangement.
These are short term.
You get the deposit of another currency when we pay out ours.
This is ideal for the central bank to do.
And you can see why they're worried about this. Right in the nineteen thirties, Congress sets up the Exchange Stabilization Fund and puts it in the Treasury Department, limits its funding and says this is the way the US government is going to manage exchange fluctuation of the dollar against other currencies. And now we have the Treasury going to the FED and saying we don't have enough gunpowder. Can you do it for us? So the FED might think, well,
go to Congress and get more appropriation. You're kind of putting us in a tight spot here. This is just sort of also stage one, which is the foreign exchange swap lines. There becomes an additional pressure point for the FED, which is the swap lines that are also set up in parallel to support euro dollar issue ince overseas. So the sort of conventional swap lines the sort of standard account of this period. When the swap lines are set up, it's all focused on replacing the ESF to intervene in
foreign exchange markets. But they set up these parallel swap lines that are about lending dollars to foreign central banks. And there you have the FED also in a spot because the Federal Reserve Act was not set up with the idea in mind that the Federal Reserve would be essentially facilitated the backstopping of euro dollar issuers in overseas markets.
But the Treasury is gung ho, and this is existential for the administration because they have tied themselves to the mass of the thirty five dollars peg, and they are afraid of both the political end financial consequences of showing
any weakness. And so just even to have the Treasure Secretary go to Congress and say we don't have enough resources in the ESF, they would be afraid about the lack of confidence that that might signal to the market about the American ability to keep to the thirty five dollars.
So they get the approval eventually with the backing of the Treasure General Counsel and Bobby Kennedy and everyone kind of gets together and the committee approves, and so now they have swap lines and they need someone to run them and so this is where we meet kind of the third character here, this guy Charlie Cooms. It's kind of the true believer. You can I think of Douglas Dylan as kind of the operator. He's like em in
the James Bond canon. You could think of Barb Russ as Q, right, he's coming up with all the ideas with the different gadgets they can use. But Double O seven is Charlie Coombs franchise. Shot was his liaison with the Treasury in those early years, and he remembers Coombs as a quote unquote CIA type operator.
Well, he was a pretty complex personality, but underneath it all, he was a CIA type operator. He was a discrete spy over head in the national interest of the United States, which he thought he knew exactly what it was at heart, and he was willing to do with anything in order to achieve those objective. He was a tool operator.
And now we don't know this for sure, but he was actually counter intelligence during the Second World War. He ends up in Greece in nineteen forty seven, right after the Civil War starts. That's the origins of containment. It's the first CIA hot zone they called it. And then he comes back to New York as a PhD economist and gets Bob Rus's old job. Actually he was Ruth's deputy, and then he gets Ruth's job, and then he's selected as the Special Manager for Foreign Exchange in nineteen sixty two.
Now the system open market account Manager manages the bond portfolio, still does, but they create a new position that's very senior in the organization called a Special Manager for Foreign Exchange, and his job is to negotiate and operate the swap lines. And the understanding seems to have been that the Treasury
would call the shots. They're what one of their former officers, who was actually the gopher between the Treasury and the FED, described as the Treasury having political authority and the FED having technical authority, Meaning the Treasury is ultimately calling the shots for who gets what when, and the FED goes out and makes that happen. Now, we just know that from one oral interview, so like what actually happened on a day to day basis is harder to say, but
it was generally acknowledged. And Rusa represents to Kennedy the fact that Treasury is sort of in charge of international relations in a financial context, and so Charlie runs around Europe setting up swap lines, art with London and Paris and the usual places. He also ends up in Basle, Switzerland. Basil, Switzerland is the headquarters of the Bank for National Settlements, which is an old institution. It comes from I think nineteen thirty one. It's founded and it's essentially a bank
to central banks. So it's a convening point for central bank still is. It's a very important institution. They have their own banking services today and in the nineteen sixties. And so he sets up a secret swap line with the Bank for the National Settlements that is in currencies other than Swiss Franks, despite the fact that they're in Switzerland, and the explicit purpose of that, which recent research has sort of revealed through archival stuff, is to support the
ear dollar market, and they do that in Switzerland. They do it around ur ends sort of seasonal stringency. They provide liquidity to the ear dollar market. So they're actively supporting the stability of eurobanks. As soon as these swap lines are in place, they're they're relatively active use and so now you have this reciprocal credit agreement network. That's what they call it. They didn't call them swap lines
at the time. Kennedy tells Congress about this in his Bounce a payments message, and he's like very proud of this is like one of the clever effective backstops of the global dollar system, because now the US can use the firepower of its central bank to keep the dollars stable and strong internationally.
But as they started out, Oosa, who by then was a federal government official, was asserting the supremacy of the political arm, and Holmes was advertise and William Chetney Watten, we're trying to assert the supremacy of the technical arm to carry out the technical OPVOI, you know what I mean. Combs and his associates, we're trying to make us look like you have to be really good for an exchange man and know the markets in order to know what
you're doing. And an Osa and Diven we're saying, including on foreign policy, and we know best what to do.
You know, this is the point where the system can really grow. So euro dollars now have implicit backing from the Federal Reserve, or at least by arm's length through the BIS. They have a source of liquidity in dollars, and so they grow rapidly. And the interestiqualization tax, which is the mechanism by which they pushed some of this financial activity offshore, provides yet another use case. Eurobonds are issued, which is just dollar denominated bonds listed in Europe funded
with Euro dollars. The proceeds of those raises go into eurodo system, and everything's kind of set up for a virtuous cycle. And by the end of the decade, it's a massive market.
You go from like half a tether to a Bank of America.
Yeah, in nineteen seventy it's a seventy billion dollar market. If you size that to the US economy, it's about one point eight trillion dollars in today's standards. So it's a very big market by the end of the decade, and it's starting to be more trouble than it's worth. So there have been warnings along the way this thing might be a problem. It's funding speculation, potentially against the dollar.
It's somewhat unstable. Regulations are not uniform. There are some attempts to control it, but the US kind of juices is a bit by regulation Q is adjusted in a way that facilitates ear a Dollar's no other reasons for that that made sense domestically, But they're willing to let the year dollar market grow. They don't really put reserve requirements on it. And actually Martin is quite resistant even to putting reserve requirements on US bank branches that are
raising year dollars. He tends not to bring the issue up in meetings. And now you have this, let's call it one point eight trillion in today's terms, growing twenty five percent a year, and people are starting to get worried, like really worried. And the French foreign minister who coined the term exorbitan privilege calls it a hydra headed monster. This is now people are getting worried that the system
is going to eat itself. So this is such a successful solution to the immediate problem of offshoring US financial activity that by the en the end of the decade, you have continued gold outflows funded in part by speculation through the euro dollar market, and rapid movements of capital between different places, searching for either safety or higher interest rates or both. And so the whole system is getting very unstable because at some point one of these two
things has to give. Either Euro dollars have to be controlled or this system has to get completely reworked. And it's unclear in the early seventies which of these two forces is going to prevail.
Dunk dunt, dunh What a cliffhanger. Okay, that was the second episode of our special three part series examining the origins of euro dollars. So by the end of the nineteen sixties, this market has grown from essentially nothing to about seventy billion dollars, and that growth has been essential to maintaining the breton Wood system. But the question is at what cost?
Time?
Ye I'm things you're about to get a little crazy as we head into the nineteen seventies and beyond, just sort of a wild decade I think for monetary policy. Nixon famously shaking up the entire post war monetary system. People love to talk about the Nixon gold shock, like what happened in nineteen seventy one, all these great wild charts they're always floating around on gold and crypto Twitter.
But if I'm being on this, I have very little understanding of what that actually was, why he did it, what it meant, why it was done, and so forth. So I'm looking forward to finding out.
Yeah, there's the gold shock, and there's an oil shock, and there's also a kind of financial shock in the form of a somewhat mysterious bank collapse. And we hope you'll join us for the third installment in our ongoing series in which Josh Younger and levmnand continue the story of euro dollars. But in the meantime, this has been another episode of the Authoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
I'm Joe Wisenthal. You can follow me at the Stalwart. Follow one of our special guests, levmanand he's at levmanand our other special guest, Josh Younger he's not on Twitter. Thanks to our producers Kerman Rodriguez at krbin ermann dash Ol Bennett at Dashbot and Kilbrooks at Kilbrooks. And special
thanks to our sound engineer Blake Maples. From our Oddlots content, go to bloomberg dot com slash odd lots, where we have transcripts, a blog, and a daily newsletter and you can chat about all of these topics twenty four to seven in our discord Discord dot gg slash.
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