History
Gradually, after the Second World War, the quantity of U.S. dollars outside the United States increased enormously, as a result of both the Marshall Plan and imports into the U.S., which had become the largest consumer market after World War II.
As a result, enormous sums of U.S. dollars were in the custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, granted by certificates.
During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28, 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed "Eurbank dollars" after the bank's telex address, they eventually became known as "eurodollars" as such deposits were at first held mostly by European banks and financial institutions. A major role was played by City of London banks, as the Midland bank, now HSBC, and their offshore Holding Companies.
By the end of 1970 385,000M eurodollars were booked offshore. These deposits were lent on as US dollar loans to businesses in other countries where interest rates on loans were perhaps much higher in the local currency, and where the businesses were exporting to the USA and being paid in dollars, thereby avoiding currency risk.
Several factors led Eurodollars to overtake certificates of deposit (CDs) issued by U.S. banks as the primary private short-term money market instruments by the 1980s, including:
- The successive commercial deficits of the United States
- The U.S. Federal Reserve's ceiling on domestic deposits during the high inflation of the 1970s
- Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments
Read more about this topic: Eurodollar
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