1 00:00:02,720 --> 00:00:12,320 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:11,600 --> 00:00:13,600 Speaker 2: Joe, Joe, what's the noise? 3 00:00:14,760 --> 00:00:15,440 Speaker 3: Where's this going? 4 00:00:15,560 --> 00:00:17,079 Speaker 2: Tracy, I'm setting the scene? 5 00:00:18,280 --> 00:00:18,840 Speaker 3: What was that? 6 00:00:19,640 --> 00:00:20,600 Speaker 1: All right, let's just start. 7 00:00:20,680 --> 00:00:23,680 Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway and this is 8 00:00:23,760 --> 00:00:26,560 Speaker 2: a very special edition of the All Thoughts podcast. 9 00:00:27,000 --> 00:00:27,360 Speaker 4: Tracy. 10 00:00:27,480 --> 00:00:29,680 Speaker 1: So, one thing I've been really fascinated by, and I 11 00:00:29,800 --> 00:00:32,480 Speaker 1: mentioned it on some episodes lately, I've been really getting 12 00:00:32,520 --> 00:00:35,519 Speaker 1: into Cold War history actually, and I guess I don't know, 13 00:00:35,560 --> 00:00:37,720 Speaker 1: probably because I'm a middle aged man and that's a 14 00:00:37,800 --> 00:00:41,479 Speaker 1: middle aged man hobby. You start reading about twentieth century history, 15 00:00:41,800 --> 00:00:45,839 Speaker 1: but particularly Soviet and Chinese history. And one thing I've learned, 16 00:00:46,159 --> 00:00:48,480 Speaker 1: and this did actually come up on an old episode, 17 00:00:48,680 --> 00:00:51,840 Speaker 1: there's some interesting financial linkages in the past that people 18 00:00:51,960 --> 00:00:54,320 Speaker 1: might not have expected at all, and I feel like 19 00:00:54,320 --> 00:00:55,640 Speaker 1: more people should be talking about this. 20 00:00:55,960 --> 00:00:59,280 Speaker 2: I agree. And also, if you like Cold War history, Joe, 21 00:00:59,320 --> 00:01:01,920 Speaker 2: you are going to love what we are about to do, 22 00:01:02,000 --> 00:01:04,640 Speaker 2: because there is a big connection between the history of 23 00:01:04,680 --> 00:01:08,640 Speaker 2: the Cold War and the development of the modern financial system, 24 00:01:08,959 --> 00:01:12,720 Speaker 2: and that connection is euro dollars. And of course, just 25 00:01:12,800 --> 00:01:16,520 Speaker 2: to be clear, this is not the euro dollar exchange rate. 26 00:01:17,240 --> 00:01:21,319 Speaker 1: I will fully admit that it took me ten years, 27 00:01:21,560 --> 00:01:24,840 Speaker 1: like ten years, maybe less, maybe five, No, it probably 28 00:01:24,959 --> 00:01:27,160 Speaker 1: was closer to ten. That euro dollar did not mean 29 00:01:27,600 --> 00:01:30,119 Speaker 1: the euro the EU R USD exchange rate. 30 00:01:30,240 --> 00:01:33,000 Speaker 2: It can be admittedly confusing, So why don't we just 31 00:01:33,080 --> 00:01:38,400 Speaker 2: define it right away? So euro dollars are dollar denominated 32 00:01:38,440 --> 00:01:42,959 Speaker 2: bank deposits held at foreign banks or overseas branches of 33 00:01:43,160 --> 00:01:45,960 Speaker 2: US banks. And you can think of them as basically 34 00:01:46,000 --> 00:01:50,360 Speaker 2: offshore dollars that sit outside the US banking system and 35 00:01:50,520 --> 00:01:53,720 Speaker 2: kind of away from the Federal Reserve. They're basically a 36 00:01:53,880 --> 00:01:57,240 Speaker 2: very special form of money. You could call them shadow money. 37 00:01:57,400 --> 00:02:00,000 Speaker 1: And it's totally gigantic. So it's almost ten trillion dollar 38 00:02:00,560 --> 00:02:03,080 Speaker 1: And I just find it so interesting, right because when 39 00:02:03,120 --> 00:02:06,920 Speaker 1: I think of dollars, they're either coming from you know, 40 00:02:06,960 --> 00:02:11,560 Speaker 1: the government spends dollars into existence or US bank credit. 41 00:02:11,760 --> 00:02:15,800 Speaker 1: US banks licensed to de facto create dollars or deposits 42 00:02:15,840 --> 00:02:16,200 Speaker 1: it will. 43 00:02:16,800 --> 00:02:18,079 Speaker 4: And yet euro. 44 00:02:17,960 --> 00:02:20,079 Speaker 1: Dollars are kind of this weird thing, I guess, because 45 00:02:20,080 --> 00:02:21,080 Speaker 1: they're not that. 46 00:02:21,560 --> 00:02:25,400 Speaker 2: Yeah, they're not either of those. And euro dollars didn't 47 00:02:25,440 --> 00:02:29,000 Speaker 2: just spring up fully formed out of thin air. They 48 00:02:29,000 --> 00:02:32,280 Speaker 2: were the result of a series of decisions, all aimed 49 00:02:32,320 --> 00:02:35,880 Speaker 2: at solving particular problems. And that's what we're going to 50 00:02:35,960 --> 00:02:40,000 Speaker 2: hear about today. So the origins of the euro dollar market, 51 00:02:40,240 --> 00:02:44,160 Speaker 2: and this story has a lot in it. There's political intrigue, 52 00:02:44,600 --> 00:02:48,720 Speaker 2: rivalry between the East and West, big existential questions about 53 00:02:48,720 --> 00:02:51,480 Speaker 2: the role of the US dollar itself in the global 54 00:02:51,520 --> 00:02:56,359 Speaker 2: financial system. Just a lot of fascinating history to satisfy 55 00:02:56,520 --> 00:02:58,880 Speaker 2: your new middle aged man fans. 56 00:02:59,160 --> 00:03:03,320 Speaker 1: Thank you. And we literally literally have the perfect guests 57 00:03:03,360 --> 00:03:04,480 Speaker 1: to tell this story. 58 00:03:04,440 --> 00:03:07,000 Speaker 2: While we're trapped in this bunker or vault. 59 00:03:07,480 --> 00:03:10,440 Speaker 1: Yeah, you might recognize our storytellers. We're going to be 60 00:03:10,480 --> 00:03:13,400 Speaker 1: speaking once again with Levmnand and Josh Younger. 61 00:03:13,520 --> 00:03:16,680 Speaker 4: I'm levmanand I'm a law professor at Columbia Law School, 62 00:03:16,680 --> 00:03:19,040 Speaker 4: where I study money and banking and the history of 63 00:03:19,120 --> 00:03:19,800 Speaker 4: central banking. 64 00:03:20,440 --> 00:03:22,440 Speaker 5: I'm Josh Younger. I'm a policy advisor at the Federal 65 00:03:22,440 --> 00:03:25,200 Speaker 5: Reserve Bank of New York and the views I am 66 00:03:25,240 --> 00:03:27,560 Speaker 5: going to express are my own and not necessarily those 67 00:03:27,600 --> 00:03:29,080 Speaker 5: of the Federal Reserve Bank of New York or the 68 00:03:29,080 --> 00:03:30,079 Speaker 5: Federal Reserve System. 69 00:03:30,400 --> 00:03:33,120 Speaker 1: They have been digging deep into archives and are ready 70 00:03:33,160 --> 00:03:35,240 Speaker 1: to tell us the story of the hidden History of 71 00:03:35,240 --> 00:03:37,880 Speaker 1: Your Dollars in this very special series. There's going to 72 00:03:37,920 --> 00:03:39,560 Speaker 1: be three episodes with Levin. 73 00:03:39,360 --> 00:03:42,880 Speaker 2: Josh and because it's so good, they tell the story 74 00:03:43,040 --> 00:03:45,800 Speaker 2: so well, Joe and I aren't going to say anything 75 00:03:45,800 --> 00:03:47,240 Speaker 2: at all. We're just going to listen in. 76 00:03:47,440 --> 00:03:49,720 Speaker 1: I love this. We should do all of our episodes 77 00:03:49,760 --> 00:03:50,640 Speaker 1: like that, where we just get to. 78 00:03:50,600 --> 00:03:52,720 Speaker 2: There, just cut ourselves out, all right, let's do it. 79 00:04:27,760 --> 00:04:31,120 Speaker 5: So euro dollars are among the most important financial instruments 80 00:04:31,240 --> 00:04:34,400 Speaker 5: in the world, really the backbone of the global dollar system. 81 00:04:34,880 --> 00:04:38,440 Speaker 5: But they come from a very humble beginnings, very idiosyncratic start, 82 00:04:38,480 --> 00:04:41,240 Speaker 5: and really it all started in Yugoslavia. And I mean 83 00:04:41,240 --> 00:04:43,560 Speaker 5: that quite literally. This is like the original sin that 84 00:04:43,720 --> 00:04:47,000 Speaker 5: leads to the development of euro dollars, and it starts 85 00:04:47,120 --> 00:04:50,719 Speaker 5: especially when Marshal Tita takes over in Yugoslavia. So in 86 00:04:50,800 --> 00:04:54,520 Speaker 5: nineteen forty five and November there's a communist revolution and 87 00:04:54,560 --> 00:04:56,279 Speaker 5: the US is miffed in a bunch of ways, but 88 00:04:56,320 --> 00:04:59,400 Speaker 5: one of them is that the old government owes them money, 89 00:05:00,040 --> 00:05:01,360 Speaker 5: and so the question is how are they going to 90 00:05:01,440 --> 00:05:04,760 Speaker 5: get it? And a few months later, Tito asked for 91 00:05:04,839 --> 00:05:07,520 Speaker 5: his gold back because the Yugoslav government had seventy million 92 00:05:07,560 --> 00:05:10,520 Speaker 5: dollars worth of gold in New York, and the Secretary 93 00:05:10,520 --> 00:05:13,600 Speaker 5: of State, George Marshall, of the Marshall Plan, he realizes 94 00:05:13,600 --> 00:05:16,120 Speaker 5: he's got a bargaining ship, which is the gold. It's 95 00:05:16,120 --> 00:05:18,280 Speaker 5: in New York, and they don't get it back until 96 00:05:18,279 --> 00:05:21,000 Speaker 5: they settle their claims. Now, even people within the State 97 00:05:21,040 --> 00:05:24,480 Speaker 5: Department were kind of skeptical of this. The Yugoslavian government 98 00:05:24,480 --> 00:05:26,560 Speaker 5: is obviously furious, and so the Russians, who at this point, 99 00:05:26,600 --> 00:05:28,599 Speaker 5: you know, Tito and Stallin have a falling out eventually 100 00:05:29,040 --> 00:05:30,720 Speaker 5: a few years later, but at this point they're quite 101 00:05:30,760 --> 00:05:34,600 Speaker 5: closely aligned, and so the Russians are furious. The Yugoslavian 102 00:05:34,600 --> 00:05:38,080 Speaker 5: government is furious. The State Department internally has some turmoil 103 00:05:38,080 --> 00:05:40,599 Speaker 5: over this, and they take it to the UN, which 104 00:05:40,600 --> 00:05:44,120 Speaker 5: has just been constituted, and the UN says pass they 105 00:05:44,160 --> 00:05:47,359 Speaker 5: won't consider the claim, and so the Russians get the 106 00:05:47,440 --> 00:05:50,040 Speaker 5: sense that the US is willing to use gold as 107 00:05:50,040 --> 00:05:53,080 Speaker 5: a bargaining ship. They'd previously actually been building up dollar 108 00:05:53,120 --> 00:05:55,360 Speaker 5: balances in New York. This is kind of a misnomer 109 00:05:55,400 --> 00:05:57,040 Speaker 5: about the post war period. There's this sense that the 110 00:05:57,120 --> 00:06:00,839 Speaker 5: Russians are extracting all their resources from but they're actually 111 00:06:00,839 --> 00:06:03,480 Speaker 5: building up reserves of dollars because the thought is, we're 112 00:06:03,480 --> 00:06:05,200 Speaker 5: probably going to need to trade with these people. We 113 00:06:05,240 --> 00:06:07,280 Speaker 5: have a trading company based in the US, and they 114 00:06:07,279 --> 00:06:11,080 Speaker 5: need resources, and so they're building up foreign currency deposits 115 00:06:11,120 --> 00:06:14,479 Speaker 5: and gold. But in nineteen forty seven they realize it's 116 00:06:14,520 --> 00:06:16,320 Speaker 5: not going to go well potentially, and they. 117 00:06:16,240 --> 00:06:17,000 Speaker 3: Pull all the gold out. 118 00:06:17,000 --> 00:06:18,920 Speaker 5: They actually just called banks in New York and they say, 119 00:06:18,920 --> 00:06:22,920 Speaker 5: we want to go back, a massive reversal of the policy. 120 00:06:23,080 --> 00:06:25,520 Speaker 5: And the questions where's it going to go? And so 121 00:06:25,640 --> 00:06:29,039 Speaker 5: they need dollars because the US dollar is the currency 122 00:06:29,040 --> 00:06:30,800 Speaker 5: of foreign exchange. If they want to trade with the West, 123 00:06:30,839 --> 00:06:33,360 Speaker 5: they have to trade in dollars. They need gold because 124 00:06:33,520 --> 00:06:36,080 Speaker 5: gold is the basis for the monetary system. And so 125 00:06:36,880 --> 00:06:38,880 Speaker 5: the question is where can they put gold and dollars 126 00:06:39,400 --> 00:06:42,479 Speaker 5: in a safe place that's still on the right side 127 00:06:42,480 --> 00:06:44,679 Speaker 5: of what was then already known as the Iron Curtain. 128 00:06:45,279 --> 00:06:47,760 Speaker 5: And so it turns out Paris is the ticket. They've 129 00:06:47,800 --> 00:06:50,280 Speaker 5: actually been secretly stockpiloting cash and gold in Paris. They 130 00:06:50,279 --> 00:06:52,320 Speaker 5: put it in briefcases. They would fly people to Paris 131 00:06:52,760 --> 00:06:54,640 Speaker 5: and put it in the consulate offices. They would just 132 00:06:54,680 --> 00:06:58,040 Speaker 5: build up piles of cash and gold. And in particular 133 00:06:58,480 --> 00:07:01,640 Speaker 5: there's a bank b SENT that I won't try to 134 00:07:01,680 --> 00:07:04,200 Speaker 5: do it in French and BCN is owned by or 135 00:07:04,279 --> 00:07:07,440 Speaker 5: run by a notorious communist synthesizer who has a very 136 00:07:07,440 --> 00:07:09,520 Speaker 5: good relationship with the Palaparo. And so there's a friendly 137 00:07:09,560 --> 00:07:13,440 Speaker 5: bank and so they take on deposit the Soviet money 138 00:07:13,600 --> 00:07:16,960 Speaker 5: and Bsen's moniker and the telex system that they used 139 00:07:16,960 --> 00:07:21,400 Speaker 5: to communicate was Eurobank, and so euro dollars were initially 140 00:07:21,680 --> 00:07:25,400 Speaker 5: in the late forties just deposits issued by Eurobank BCN 141 00:07:25,880 --> 00:07:28,400 Speaker 5: generally for the Soviet, so they're also for the Chinese. 142 00:07:28,760 --> 00:07:31,280 Speaker 5: And slowly this starts to percolate. There's another communist O 143 00:07:31,280 --> 00:07:34,120 Speaker 5: one bank in London, there's one in Brussels which DCIA 144 00:07:34,200 --> 00:07:36,360 Speaker 5: just describes as run by someone with few scruples, I 145 00:07:36,360 --> 00:07:38,200 Speaker 5: think was the way they put it. And so there's 146 00:07:38,240 --> 00:07:41,080 Speaker 5: some friendlies across Europe are willing to take their money, 147 00:07:41,520 --> 00:07:45,240 Speaker 5: and the euro dollar market begins this way, which is 148 00:07:45,280 --> 00:07:48,480 Speaker 5: preempt to sanctions evasion, basically that we might be sanctioned. 149 00:07:49,200 --> 00:07:51,240 Speaker 5: It happened to Tito, it might happen to us, and 150 00:07:51,280 --> 00:07:53,400 Speaker 5: so we need a safe place to go, and the 151 00:07:53,440 --> 00:07:56,160 Speaker 5: European regulations allowed for this, and they need dollars again 152 00:07:56,280 --> 00:07:59,880 Speaker 5: because they trade with the West, and so the first 153 00:08:00,080 --> 00:08:02,360 Speaker 5: severe dollars is for that, and also to replace the 154 00:08:02,360 --> 00:08:05,120 Speaker 5: salaries of striking French coal miners. See an Their potential 155 00:08:05,160 --> 00:08:07,000 Speaker 5: place to do this is the record's not super clear. 156 00:08:07,440 --> 00:08:09,280 Speaker 4: I think it's worth pausing here for a second to 157 00:08:09,360 --> 00:08:13,600 Speaker 4: ask why wouldn't the Soviets have just been in France 158 00:08:13,640 --> 00:08:17,520 Speaker 4: all along? Why were they in New York initially? Why 159 00:08:17,600 --> 00:08:20,720 Speaker 4: had another people thought of this? And I think the 160 00:08:20,800 --> 00:08:28,080 Speaker 4: answer is the dollar liabilities of communist sympathizing French bank 161 00:08:28,520 --> 00:08:32,840 Speaker 4: are not the same thing as the dollar liabilities of 162 00:08:32,880 --> 00:08:36,000 Speaker 4: a bank headquartered in New York. And I think it's 163 00:08:36,160 --> 00:08:38,959 Speaker 4: helpful to think about why we even hold the dollar 164 00:08:39,040 --> 00:08:43,400 Speaker 4: liabilities of a bank headquartered in New York, Like even today, 165 00:08:43,720 --> 00:08:46,400 Speaker 4: when you log onto your bank account and you see 166 00:08:46,480 --> 00:08:50,120 Speaker 4: a balance five thousand dollars, ten thousand dollars, the bank 167 00:08:50,160 --> 00:08:54,280 Speaker 4: doesn't hold US government dollars to back that, and yet 168 00:08:54,520 --> 00:08:58,520 Speaker 4: we are very comfortable treating those as equivalent. We aren't 169 00:08:58,640 --> 00:09:01,440 Speaker 4: concerned that those those dollars are not the same thing. 170 00:09:02,120 --> 00:09:05,240 Speaker 4: And why is that? There's a number of factors that 171 00:09:05,320 --> 00:09:08,400 Speaker 4: go into it. Of course, since nineteen thirties, we've had 172 00:09:08,600 --> 00:09:10,959 Speaker 4: deposit insurance up to a two hundred and fifty thousand 173 00:09:10,960 --> 00:09:15,960 Speaker 4: dollars balance. Of course, businesses routinely hold larger balances and 174 00:09:16,000 --> 00:09:19,880 Speaker 4: they are comfortable treating them as equivalent. Well, there's the 175 00:09:19,920 --> 00:09:22,200 Speaker 4: implicit backing of the United States that comes from the 176 00:09:22,200 --> 00:09:25,000 Speaker 4: fact that your bank was actually chartered by the US government, 177 00:09:25,040 --> 00:09:27,280 Speaker 4: it's supervised by the US government. There's a sense that 178 00:09:27,280 --> 00:09:29,960 Speaker 4: it's backed by the US government. And then there's the 179 00:09:30,080 --> 00:09:34,160 Speaker 4: actual institutional apparatus of the Federal Reserve, which has a 180 00:09:34,200 --> 00:09:37,920 Speaker 4: facility the discount window. And if you do go to 181 00:09:37,960 --> 00:09:40,840 Speaker 4: your bank and say I actually want to turn this 182 00:09:41,040 --> 00:09:44,800 Speaker 4: balance into government cash, the bank can go to the 183 00:09:44,800 --> 00:09:47,600 Speaker 4: Federal Reserve and get that cash. The FED can print 184 00:09:47,640 --> 00:09:50,080 Speaker 4: it for the bank and hand it over. And so 185 00:09:50,120 --> 00:09:54,800 Speaker 4: there's this whole apparatus that facilitates you treating your balance 186 00:09:54,840 --> 00:09:58,080 Speaker 4: at a US bank as equivalent to government cash. Those 187 00:09:58,120 --> 00:10:01,800 Speaker 4: are trading at par This bank over in France that's 188 00:10:01,840 --> 00:10:05,040 Speaker 4: now issuing these dollar liabilities that the Soviets are holding. 189 00:10:05,400 --> 00:10:08,880 Speaker 4: Why should we think that that should maintain par equivalents 190 00:10:08,880 --> 00:10:12,319 Speaker 4: to US government dollars, that bank's not FDIC insured, that 191 00:10:12,360 --> 00:10:14,640 Speaker 4: bank's not chartered by the US government, that bank's not 192 00:10:14,720 --> 00:10:17,319 Speaker 4: supervised by the US government, and that bank can't call 193 00:10:17,400 --> 00:10:20,280 Speaker 4: up the FED when the Soviets are drawing down their balance, 194 00:10:20,720 --> 00:10:22,800 Speaker 4: and the FED won't print money and hand it over. 195 00:10:23,040 --> 00:10:25,840 Speaker 4: And so this move by the Soviets, they're taking on 196 00:10:25,920 --> 00:10:27,800 Speaker 4: a lot of risk to get out of the US, 197 00:10:28,280 --> 00:10:30,520 Speaker 4: and they're doing it because they're worried about the risk 198 00:10:30,600 --> 00:10:33,360 Speaker 4: on the other side, the Yugoslavia risk, the risk that 199 00:10:33,920 --> 00:10:37,679 Speaker 4: the US will actually freeze their balances, and so they 200 00:10:37,720 --> 00:10:41,360 Speaker 4: have much higher risk tolerance, and they are willing to 201 00:10:41,400 --> 00:10:44,760 Speaker 4: go out and try something different, which is whole dollar 202 00:10:44,800 --> 00:10:45,760 Speaker 4: balances offshore. 203 00:10:46,120 --> 00:10:47,880 Speaker 5: And it's the risk for the bank taking it as well, 204 00:10:47,880 --> 00:10:49,640 Speaker 5: because the question for Beesson and others is what are 205 00:10:49,640 --> 00:10:51,760 Speaker 5: you going to do with this money. So there's actually 206 00:10:51,800 --> 00:10:54,400 Speaker 5: an antecedent to the eurodona market from the twenties when 207 00:10:54,400 --> 00:10:56,559 Speaker 5: the dollar is actually the global reserve currency in the twenties, 208 00:10:56,600 --> 00:10:59,480 Speaker 5: and then it lost that status in the thirties. But 209 00:11:00,000 --> 00:11:02,760 Speaker 5: at that time dollar acceptances, which is a form of 210 00:11:02,760 --> 00:11:06,360 Speaker 5: trade finance, were larger than ones drawn on London, and 211 00:11:06,400 --> 00:11:08,640 Speaker 5: the dollar was the currents eve international trade and in 212 00:11:08,640 --> 00:11:11,400 Speaker 5: particular the reserve currency of the world. It was the largest, 213 00:11:11,440 --> 00:11:13,720 Speaker 5: was much bigger than Stirling, at least for a few years. 214 00:11:14,400 --> 00:11:17,160 Speaker 5: And as a consequence of that, some of the Austrian 215 00:11:17,160 --> 00:11:20,160 Speaker 5: banks in particularly started issuing dollar deposits. There's one in 216 00:11:20,200 --> 00:11:23,080 Speaker 5: particular in Austria that did a pretty brisk business in this, 217 00:11:23,120 --> 00:11:24,880 Speaker 5: and they were doing inter bank deposits. They were doing 218 00:11:25,200 --> 00:11:27,880 Speaker 5: private deposits like non bank deposits. It looked a lot 219 00:11:27,920 --> 00:11:31,160 Speaker 5: like the euro dollar market. The difference is they were 220 00:11:31,200 --> 00:11:33,600 Speaker 5: basically holding it in cash on the other side, so 221 00:11:33,640 --> 00:11:37,200 Speaker 5: it was more of a correspondent custody type arrangement. And 222 00:11:37,240 --> 00:11:39,560 Speaker 5: so the question for a bank taking deposits is not 223 00:11:40,200 --> 00:11:43,200 Speaker 5: are you comfortable issuing deposits? Of course they're comfortable issuing deposits. 224 00:11:43,240 --> 00:11:44,720 Speaker 5: What are you going to do with the money? And 225 00:11:44,760 --> 00:11:47,920 Speaker 5: so what can a communist own bank in Paris in 226 00:11:48,000 --> 00:11:50,840 Speaker 5: nineteen forty eight do with the money? And at the 227 00:11:50,880 --> 00:11:53,440 Speaker 5: time there was still some trade between the East and 228 00:11:53,480 --> 00:11:56,560 Speaker 5: the West cross Iron Curtain. Now the Soviets don't like 229 00:11:56,600 --> 00:11:58,360 Speaker 5: this in general because they have this policy of self 230 00:11:58,360 --> 00:12:00,920 Speaker 5: reliance for obviously, since they don't want to rely in 231 00:12:00,920 --> 00:12:03,160 Speaker 5: the West for anything, and we actually don't know how 232 00:12:03,240 --> 00:12:04,959 Speaker 5: much of their trade this was because you'd be sent 233 00:12:05,000 --> 00:12:07,000 Speaker 5: to the goolog for talking about economic data, So no 234 00:12:07,080 --> 00:12:10,320 Speaker 5: talking about payrolls Joe in Soviet Russia in the forties, 235 00:12:10,320 --> 00:12:12,880 Speaker 5: at least starting in the forties. But the key was 236 00:12:13,320 --> 00:12:15,800 Speaker 5: there was enough to make a business out of it, 237 00:12:16,040 --> 00:12:19,400 Speaker 5: and it was in dollars. So using these dollar deposits 238 00:12:19,440 --> 00:12:22,040 Speaker 5: to finance East West cross Iron Curtain trade was profitable 239 00:12:22,040 --> 00:12:23,640 Speaker 5: in two respects. One is you just making more money 240 00:12:23,640 --> 00:12:25,679 Speaker 5: on loans and you make on cash. The others you 241 00:12:25,679 --> 00:12:27,160 Speaker 5: don't have to hedge it because you have a dollar 242 00:12:27,200 --> 00:12:30,280 Speaker 5: asset a dollar loan to facilitate trade, and a dollar 243 00:12:30,320 --> 00:12:33,480 Speaker 5: liability a dollar deposit, so you're not taking foreign exchange risk. 244 00:12:34,080 --> 00:12:36,000 Speaker 5: And so that turns out to be an okay business. 245 00:12:36,000 --> 00:12:38,240 Speaker 5: Like there's not enough of that to make for a 246 00:12:38,320 --> 00:12:40,880 Speaker 5: large market, but it grows. You know, it's two hundred 247 00:12:40,880 --> 00:12:43,960 Speaker 5: million dollars in the early fifties and so like this 248 00:12:44,000 --> 00:12:47,240 Speaker 5: is the seed that's planted, and it basically sets a precedent, 249 00:12:47,240 --> 00:12:49,440 Speaker 5: which is banks are willing to do this. But the 250 00:12:49,520 --> 00:12:51,920 Speaker 5: question is how do you make this a bigger business? 251 00:12:52,000 --> 00:12:55,040 Speaker 5: What are the business opportunities to do it, and that's 252 00:12:55,120 --> 00:12:58,400 Speaker 5: where the early fifties are a critical period because after 253 00:12:58,440 --> 00:13:00,960 Speaker 5: the war, most foreign exchange markets are you're straight up closed. 254 00:13:01,160 --> 00:13:03,680 Speaker 5: The British in particular are like heavily controlling their currency. 255 00:13:04,240 --> 00:13:05,880 Speaker 5: London's the obvious place to do this kind of business. 256 00:13:05,920 --> 00:13:06,320 Speaker 3: It's still a. 257 00:13:06,320 --> 00:13:08,720 Speaker 5: Center for international trade, but they can't hedge, so if 258 00:13:08,760 --> 00:13:12,440 Speaker 5: they issue dollar deposits, they're just holding dollars. And unless 259 00:13:12,440 --> 00:13:14,640 Speaker 5: they have a dollar loan to make, on the other hand, 260 00:13:14,640 --> 00:13:17,280 Speaker 5: which they didn't necessarily have at the time, you're just 261 00:13:17,320 --> 00:13:20,679 Speaker 5: warehousing the risk that the dollar depreciates or appreciates relative 262 00:13:20,720 --> 00:13:22,840 Speaker 5: to sterling, which is ultimately what you pay employees in 263 00:13:22,880 --> 00:13:26,160 Speaker 5: that's your sterling funder, meaning like you are a British business, 264 00:13:26,640 --> 00:13:29,360 Speaker 5: you care mostly about Stirling. Then in nineteen fifty two, 265 00:13:29,760 --> 00:13:32,840 Speaker 5: as things are starting to improve, the Marshall Plan is 266 00:13:32,880 --> 00:13:35,600 Speaker 5: mostly done, the dollar gap has been mostly filled. We'll 267 00:13:35,600 --> 00:13:38,520 Speaker 5: talk about that a little little bit, and things are normalizing, 268 00:13:38,520 --> 00:13:41,920 Speaker 5: so the British feel comfortable partially liberalizing their foreign exchange 269 00:13:41,960 --> 00:13:44,720 Speaker 5: markets now, not all at once. The spot meaning today 270 00:13:44,760 --> 00:13:47,280 Speaker 5: you want to exchange sterling for dollars, the rate at 271 00:13:47,320 --> 00:13:49,240 Speaker 5: which you can do. That is still heavily controlled by 272 00:13:49,280 --> 00:13:52,280 Speaker 5: the Bank of England. It's in a range that's widened, 273 00:13:52,320 --> 00:13:55,720 Speaker 5: but it's still pretty narrow. But in particular they've liberalized 274 00:13:55,760 --> 00:13:58,520 Speaker 5: the foreign exchange futures market or forward market. So what 275 00:13:58,600 --> 00:14:00,520 Speaker 5: is a foreign exchange forward. A foreign exchange forward is 276 00:14:00,840 --> 00:14:02,840 Speaker 5: I'm going to give you dollars for sterling, not today, 277 00:14:03,160 --> 00:14:05,720 Speaker 5: maybe tomorrow, maybe in a month, maybe in a year. 278 00:14:05,800 --> 00:14:08,480 Speaker 5: This is a very very large market today. It's a 279 00:14:08,520 --> 00:14:11,520 Speaker 5: critical piece of hedging equipment for a bank because you 280 00:14:11,559 --> 00:14:14,920 Speaker 5: can use those forwards. If you've borrowed dollars and lent 281 00:14:15,000 --> 00:14:17,120 Speaker 5: them out for say a year, you don't want to 282 00:14:17,120 --> 00:14:19,640 Speaker 5: hedge your dollar risk today. You want to hedge it 283 00:14:19,680 --> 00:14:21,400 Speaker 5: for the return of those dollars in a year. You 284 00:14:21,440 --> 00:14:23,120 Speaker 5: want a coverage for the full term of the loan. 285 00:14:23,640 --> 00:14:25,600 Speaker 5: So the forwards market is critical to this, and so 286 00:14:26,200 --> 00:14:29,320 Speaker 5: the Bank of England says, now you can trade forwards 287 00:14:29,920 --> 00:14:32,680 Speaker 5: on dollar, sterling and other major currencies, but in particular 288 00:14:32,720 --> 00:14:36,640 Speaker 5: dollars sterling, and we won't control that rate. So now 289 00:14:36,640 --> 00:14:39,760 Speaker 5: there's a hedging instrument. And now banks in London can 290 00:14:39,800 --> 00:14:41,240 Speaker 5: look around and say what can I do with this? 291 00:14:41,280 --> 00:14:43,840 Speaker 5: Because there's clearly interest as a precedent for dollar deposits, 292 00:14:44,360 --> 00:14:45,960 Speaker 5: and then the question is what can I do with it? 293 00:14:46,040 --> 00:14:47,320 Speaker 3: And so they. 294 00:14:47,120 --> 00:14:49,360 Speaker 5: Figure out so it still happens today, which is there's 295 00:14:49,360 --> 00:14:52,240 Speaker 5: a shortage of dollars in the UK. That means if 296 00:14:52,240 --> 00:14:55,320 Speaker 5: they were to borrow dollars and functionally lend them out 297 00:14:55,480 --> 00:14:59,440 Speaker 5: through the FX markets, they can construct arbitrage type arrangements. 298 00:14:59,480 --> 00:15:02,200 Speaker 5: And by arbitra, I mean I borrow a dollar, I 299 00:15:02,280 --> 00:15:05,240 Speaker 5: hedge that dollar, I use the sterling proceeds of the 300 00:15:05,280 --> 00:15:08,520 Speaker 5: hedge to buy an on shore sterling asset, and I 301 00:15:08,560 --> 00:15:11,480 Speaker 5: collapse the whole thing when everything matures. So this is 302 00:15:11,520 --> 00:15:14,520 Speaker 5: just cross border interest rate arbitrage. Today we'd call it 303 00:15:14,520 --> 00:15:17,640 Speaker 5: a cross currency basis, but it is not perfectly efficient, 304 00:15:17,960 --> 00:15:20,640 Speaker 5: meaning if there's more demand for dollars or more demand 305 00:15:20,640 --> 00:15:23,640 Speaker 5: for sterling, the pricing can get out of whack relative 306 00:15:23,720 --> 00:15:25,280 Speaker 5: to the relative. 307 00:15:24,840 --> 00:15:26,320 Speaker 3: Interest rates on those two instruments. 308 00:15:26,880 --> 00:15:30,200 Speaker 5: And so the banks in London and particular Midland Bank 309 00:15:30,760 --> 00:15:34,880 Speaker 5: realizes that if they issue Euro dollars, use the dollars 310 00:15:34,920 --> 00:15:37,760 Speaker 5: they borrow through year dollar issuance to buy sterling assets 311 00:15:37,760 --> 00:15:56,200 Speaker 5: and hedge that package, they can make arbitrage profits and 312 00:15:56,240 --> 00:15:59,080 Speaker 5: so the first use case of your dollars is sanctions evasion. 313 00:15:59,520 --> 00:16:02,960 Speaker 5: The second use is to facilitate cross iron curtain trade, 314 00:16:03,000 --> 00:16:05,560 Speaker 5: although that's a pretty small business. And so the third 315 00:16:05,600 --> 00:16:09,680 Speaker 5: and much larger business is cross border interest rate arbitrage. 316 00:16:09,680 --> 00:16:12,480 Speaker 5: And that sounds really technical, but what it's really doing 317 00:16:12,560 --> 00:16:16,200 Speaker 5: is using foreign exchange markets and derivative markets to source 318 00:16:16,280 --> 00:16:20,440 Speaker 5: dollars that the UK particular needs in this post war environment. 319 00:16:20,640 --> 00:16:24,000 Speaker 5: So imagine a euro dollar bank. A eurobank takes in 320 00:16:24,000 --> 00:16:25,880 Speaker 5: a euro a dollar deposit, which means it gets a 321 00:16:25,920 --> 00:16:28,320 Speaker 5: dollar in cash. Let's think of a physical bill. That's 322 00:16:28,360 --> 00:16:33,040 Speaker 5: an asset. It issues a euro dollar liability, and then 323 00:16:33,120 --> 00:16:34,920 Speaker 5: what is it going to do next, because it needs 324 00:16:34,920 --> 00:16:36,600 Speaker 5: to do some sort of investing. And what it does 325 00:16:37,040 --> 00:16:41,080 Speaker 5: is it exchanges that dollar asset for a sterling cache 326 00:16:41,600 --> 00:16:44,440 Speaker 5: and it invests that sterling cash in some short term 327 00:16:44,760 --> 00:16:47,960 Speaker 5: sterling investment that's short bills or something like that. And 328 00:16:48,760 --> 00:16:50,360 Speaker 5: after it does that, it says, I want to hedge 329 00:16:50,360 --> 00:16:52,160 Speaker 5: my foreign exchange risk because now I have a dollar 330 00:16:52,200 --> 00:16:55,400 Speaker 5: liability and a sterling asset, So I'm going to use 331 00:16:55,480 --> 00:16:59,480 Speaker 5: the foreign exchange forward market to agree to sell that 332 00:16:59,520 --> 00:17:02,000 Speaker 5: sterling back for dollars at some point in the future 333 00:17:02,000 --> 00:17:04,520 Speaker 5: at a fixed price that we agree on today. So 334 00:17:04,600 --> 00:17:07,240 Speaker 5: that's the bank's position. Who's on the other side of 335 00:17:07,280 --> 00:17:11,920 Speaker 5: that trade. Let's say a corporation, a manufacturing entity. They 336 00:17:11,920 --> 00:17:17,280 Speaker 5: make radios, and that radio production process requires inputs. Those 337 00:17:17,320 --> 00:17:20,680 Speaker 5: inputs are imported, and so that radio production company needs 338 00:17:20,760 --> 00:17:23,600 Speaker 5: dollars with which to buy the raw materials that it 339 00:17:23,680 --> 00:17:27,040 Speaker 5: uses to make the radio that it then sells four 340 00:17:27,119 --> 00:17:30,439 Speaker 5: dollars in foreign markets, and so they get those dollars 341 00:17:30,480 --> 00:17:32,679 Speaker 5: from the Eurobank in exchange with the sterling they have 342 00:17:32,760 --> 00:17:35,920 Speaker 5: on hand. They go buy all the parts, but they 343 00:17:36,280 --> 00:17:38,200 Speaker 5: want to make sure that they know how much they're 344 00:17:38,200 --> 00:17:40,480 Speaker 5: going to receive in local currency at the end of 345 00:17:40,480 --> 00:17:43,199 Speaker 5: the production process when they sell that radio broad They 346 00:17:43,240 --> 00:17:44,960 Speaker 5: don't want the value of the dollar to go down, 347 00:17:45,840 --> 00:17:48,800 Speaker 5: so they sell those dollars forward in exchange for sterling, 348 00:17:49,040 --> 00:17:51,280 Speaker 5: and so they ventured into a derivative agreement, which is 349 00:17:51,280 --> 00:17:53,679 Speaker 5: the opposite of the one that the Eurobank has or 350 00:17:53,680 --> 00:17:57,119 Speaker 5: the eurobanking system. And so then they put together the radio, 351 00:17:57,240 --> 00:18:00,480 Speaker 5: they sell it abroad, they receive dollar proceeds, turn those 352 00:18:00,480 --> 00:18:02,600 Speaker 5: into sterling, which is what they pay their employees in 353 00:18:02,680 --> 00:18:05,720 Speaker 5: that's what they pay for their land and equipment in 354 00:18:06,320 --> 00:18:08,440 Speaker 5: and that exchange rate was the one they agreed upon 355 00:18:08,480 --> 00:18:10,960 Speaker 5: in advance through the foreign Exchange forward contract. And so 356 00:18:11,800 --> 00:18:15,040 Speaker 5: basically what's happening is the eurobanks are pulling in dollars 357 00:18:15,040 --> 00:18:18,680 Speaker 5: from abroad, distributing them through the foreign exchange market that's 358 00:18:18,720 --> 00:18:21,959 Speaker 5: trading on shore to those that need dollars today, and 359 00:18:22,000 --> 00:18:25,080 Speaker 5: then providing hedges to those that will receive dollars in 360 00:18:25,119 --> 00:18:28,119 Speaker 5: the future, and in the case of the Eurobank, the 361 00:18:28,160 --> 00:18:30,960 Speaker 5: dollars they'll owe in the future potentially to the euro 362 00:18:31,000 --> 00:18:32,119 Speaker 5: dollar deposit holder. 363 00:18:32,760 --> 00:18:36,320 Speaker 4: Think about this from the perspective of the city of 364 00:18:36,359 --> 00:18:40,199 Speaker 4: London coming out of the war and those bankers and 365 00:18:40,240 --> 00:18:42,840 Speaker 4: the world that they grew up in, which is a 366 00:18:42,880 --> 00:18:45,560 Speaker 4: world that we've completely forgotten, but was the world of 367 00:18:45,680 --> 00:18:49,640 Speaker 4: sterling dominance before the First World War and the role 368 00:18:49,720 --> 00:18:54,720 Speaker 4: that the Empire played in financing global trade. What we're 369 00:18:54,720 --> 00:18:59,880 Speaker 4: looking at in the fifties is a group of London 370 00:19:00,080 --> 00:19:05,760 Speaker 4: based financial institutions trying to figure out a way to 371 00:19:05,800 --> 00:19:12,480 Speaker 4: continue their dominance in global economy that runs on dollars 372 00:19:12,520 --> 00:19:16,040 Speaker 4: now and not on starling. And so the euro dollars 373 00:19:16,080 --> 00:19:18,520 Speaker 4: are sort of worth the risk to the City of 374 00:19:18,560 --> 00:19:22,919 Speaker 4: London and to some extent to UK financial regulators like 375 00:19:22,960 --> 00:19:26,439 Speaker 4: the Bank of England, because they need to fix their 376 00:19:26,520 --> 00:19:29,199 Speaker 4: business model for a dollar world, and they want to 377 00:19:29,240 --> 00:19:32,439 Speaker 4: get in on the dollar world. Dealing in dollars is 378 00:19:32,440 --> 00:19:34,679 Speaker 4: going to be a necessary part of that, and so 379 00:19:34,840 --> 00:19:38,520 Speaker 4: the UK is adapting here by turning to dollars and 380 00:19:38,560 --> 00:19:42,440 Speaker 4: embracing dollar liabilities for its own institutions. 381 00:19:43,119 --> 00:19:45,200 Speaker 5: And in the UK this was a particular problem because 382 00:19:45,200 --> 00:19:48,199 Speaker 5: they imported so much of what they used to produce 383 00:19:48,240 --> 00:19:52,520 Speaker 5: products that were manufactured to sell finish goods abroad, and 384 00:19:52,560 --> 00:19:55,760 Speaker 5: so there's a great newsreel from the late forties for 385 00:19:55,800 --> 00:19:58,080 Speaker 5: the British populations and you have to go without today 386 00:19:58,600 --> 00:20:02,160 Speaker 5: for high quality, clean manufactured goods so that we can 387 00:20:02,160 --> 00:20:04,280 Speaker 5: export as much as possible and source the dollars. But 388 00:20:04,320 --> 00:20:06,160 Speaker 5: another way to do it is to get euro dollars. 389 00:20:06,920 --> 00:20:10,880 Speaker 6: The Smith household is very dissatisfied. Dad wants a new wallace, 390 00:20:11,400 --> 00:20:15,840 Speaker 6: mother wants a sewing machine, and Betty wants glamorous beauty preparations. 391 00:20:16,600 --> 00:20:19,320 Speaker 6: But these are needed for export because we must build 392 00:20:19,400 --> 00:20:23,280 Speaker 6: up overseas markets. We sell these goods overseas for foreign 393 00:20:23,359 --> 00:20:27,520 Speaker 6: currency to buy the food and raw materials we need 394 00:20:27,560 --> 00:20:32,239 Speaker 6: to live and work. These things would soon vanish if 395 00:20:32,280 --> 00:20:35,879 Speaker 6: we couldn't pay for them. We must sell the things 396 00:20:35,880 --> 00:20:39,840 Speaker 6: we'd like to buy the things. 397 00:20:39,520 --> 00:20:45,360 Speaker 5: We need, and so this cross border interest rate arbitrage 398 00:20:45,480 --> 00:20:49,760 Speaker 5: is really just a way markets distribute the currency according 399 00:20:49,760 --> 00:20:53,000 Speaker 5: to who needs it and provide the hedges that facilitate 400 00:20:53,080 --> 00:20:56,160 Speaker 5: the functioning of British corporations as well. It's what we'd 401 00:20:56,160 --> 00:20:58,040 Speaker 5: call now like a use case. Right, there's like a 402 00:20:58,080 --> 00:21:02,080 Speaker 5: real underlying use case that doesn't involve the Soviet Union 403 00:21:02,440 --> 00:21:05,320 Speaker 5: for dollar deposits issued by non US banks, which you 404 00:21:05,359 --> 00:21:08,879 Speaker 5: can't emphasize enough how fundamentally strange that is, because if 405 00:21:08,920 --> 00:21:11,080 Speaker 5: I tried to make dollars by writing another piece of paper, 406 00:21:11,080 --> 00:21:12,680 Speaker 5: I don't think I'd get very far. But at the 407 00:21:12,720 --> 00:21:15,240 Speaker 5: time that's essentially what these banks are doing, and in 408 00:21:15,280 --> 00:21:19,639 Speaker 5: particular London is a more let's say, reputable locale, particularly 409 00:21:19,640 --> 00:21:23,080 Speaker 5: banks that are not known to be Communist sympathizers. There's 410 00:21:23,119 --> 00:21:24,520 Speaker 5: a little bit of a funny thing about being a 411 00:21:24,520 --> 00:21:28,000 Speaker 5: communist bank, but we won't get into that specifically, but 412 00:21:28,200 --> 00:21:30,640 Speaker 5: these are blea chip banks in London issue even dollar 413 00:21:30,680 --> 00:21:33,360 Speaker 5: deposits and that means you can use them for things 414 00:21:33,359 --> 00:21:34,920 Speaker 5: and you can feel more comfortable. Along the lines of 415 00:21:34,960 --> 00:21:36,320 Speaker 5: what Love was talking about, you can feel much more 416 00:21:36,320 --> 00:21:39,159 Speaker 5: comfortable with Midland Bank, which was among the largest in 417 00:21:39,160 --> 00:21:43,399 Speaker 5: the city, than BSEN, which is a tiny little place 418 00:21:43,920 --> 00:21:46,840 Speaker 5: on the continent. And so the market starts growing. It 419 00:21:46,880 --> 00:21:48,439 Speaker 5: has a bunch of things going for it, and the 420 00:21:48,480 --> 00:21:51,320 Speaker 5: most important, arguably is that they can pay higher interest 421 00:21:51,400 --> 00:21:54,800 Speaker 5: rates than banks in the US in general. I think 422 00:21:54,800 --> 00:21:57,040 Speaker 5: you've done podcasts before about the impact of regulation Q 423 00:21:57,119 --> 00:22:00,560 Speaker 5: at different times. Regulation Q is a ceiling interest rates 424 00:22:00,600 --> 00:22:03,200 Speaker 5: that banks can pay. It's a depression your regulation designed 425 00:22:03,240 --> 00:22:06,920 Speaker 5: to mitigate races to the bottom and bad decision making 426 00:22:06,920 --> 00:22:10,320 Speaker 5: among commercial banks, and so they are limited in what 427 00:22:10,359 --> 00:22:12,080 Speaker 5: they can pay. Now, we don't have to talk about 428 00:22:12,119 --> 00:22:13,960 Speaker 5: whether or not that should or should not have been done. 429 00:22:14,000 --> 00:22:16,120 Speaker 5: It was definitely in place in the fifties and sixties, 430 00:22:16,160 --> 00:22:18,320 Speaker 5: and so if you go to London there is no 431 00:22:18,400 --> 00:22:21,160 Speaker 5: regulation queue, so you can offer dollar deposits and pay 432 00:22:21,200 --> 00:22:24,320 Speaker 5: a higher rate of return. So that's more money, right, 433 00:22:24,400 --> 00:22:26,320 Speaker 5: So that's appealing as long as you can get your 434 00:22:26,320 --> 00:22:28,439 Speaker 5: head around the counterparty risk meeting. This is not a 435 00:22:28,560 --> 00:22:29,600 Speaker 5: New York Bank they don't have. 436 00:22:29,600 --> 00:22:30,280 Speaker 3: Access to the FED. 437 00:22:30,320 --> 00:22:32,199 Speaker 5: But as long as this market is reasonably small, they 438 00:22:32,200 --> 00:22:34,720 Speaker 5: have enough dollars on hand, they have enough dollars in reserve. 439 00:22:35,480 --> 00:22:36,800 Speaker 3: You know, maybe I feel comfortable. 440 00:22:37,119 --> 00:22:38,919 Speaker 5: The second is a much more practical thing, which it 441 00:22:38,960 --> 00:22:41,320 Speaker 5: was just hard to call New York from London. I 442 00:22:41,359 --> 00:22:43,480 Speaker 5: was somewhat surprised to learn this and reading around, but 443 00:22:43,560 --> 00:22:46,560 Speaker 5: you know, the first translanted cable for telephone communications is 444 00:22:46,640 --> 00:22:49,200 Speaker 5: nineteen fifty six, so it's after the first few out 445 00:22:49,200 --> 00:22:52,080 Speaker 5: dollars are issued by non communist banks. And even then 446 00:22:52,119 --> 00:22:54,080 Speaker 5: there were thirty six circuits, which means if you want 447 00:22:54,080 --> 00:22:56,280 Speaker 5: to call New York from London, you have to wait 448 00:22:56,320 --> 00:22:58,520 Speaker 5: online for one of thirty six open lines at some 449 00:22:58,560 --> 00:23:01,120 Speaker 5: point during the day, which could take a long time. 450 00:23:01,200 --> 00:23:04,840 Speaker 5: Was very expensive and perhaps more problematically, these cables would 451 00:23:04,840 --> 00:23:07,080 Speaker 5: get cut with some frequency, and so you've got one 452 00:23:07,160 --> 00:23:10,440 Speaker 5: transatlantic cable that can get cut for any number of reasons, 453 00:23:10,440 --> 00:23:13,440 Speaker 5: with indeterminate resolution times, and so it's just hard. There 454 00:23:13,440 --> 00:23:15,480 Speaker 5: was a telegraph cable, but like that wasn't great, and 455 00:23:15,520 --> 00:23:18,160 Speaker 5: so basically it's just like annoying to deal with an 456 00:23:18,160 --> 00:23:21,600 Speaker 5: overseas bank, especially if you need money soon. So New 457 00:23:21,680 --> 00:23:25,280 Speaker 5: York banks would generally not offer same day liquidity. 458 00:23:24,800 --> 00:23:26,720 Speaker 3: To European customers for obvious reasons. 459 00:23:26,920 --> 00:23:29,399 Speaker 5: And there's a gold rush in the transatlantic cable business. 460 00:23:29,400 --> 00:23:31,000 Speaker 5: So the next cable comes in fifty eight, there's another 461 00:23:31,040 --> 00:23:34,040 Speaker 5: one in sixty one, so the capacity expands, but you're 462 00:23:34,040 --> 00:23:36,720 Speaker 5: still talking about a few dozen lines here. So it's 463 00:23:36,760 --> 00:23:38,520 Speaker 5: just hard to manage your liquidity. 464 00:23:38,600 --> 00:23:39,560 Speaker 3: Let's say if you have. 465 00:23:39,520 --> 00:23:41,160 Speaker 5: To wait online for six hours to call your bank, 466 00:23:41,280 --> 00:23:42,840 Speaker 5: and it's a lot easier to walk down the street. 467 00:23:42,880 --> 00:23:45,199 Speaker 5: And so to the extent that dollars are used for 468 00:23:45,200 --> 00:23:47,760 Speaker 5: a national trade that trade flows through London, these banks 469 00:23:47,760 --> 00:23:50,560 Speaker 5: are in London. You know, why not have a local 470 00:23:50,600 --> 00:23:53,320 Speaker 5: branch essentially of your bank to deal with. And so 471 00:23:54,080 --> 00:23:57,439 Speaker 5: if you're offering higher interest rates and much greater convenience, 472 00:23:57,840 --> 00:24:01,640 Speaker 5: it's a very attractive product, and so it grows pretty rapidly. 473 00:24:02,200 --> 00:24:05,280 Speaker 5: It's still inhibited on the continent because you haven't restored 474 00:24:05,320 --> 00:24:09,800 Speaker 5: full convertibility until nineteen fifty eight, but at that point 475 00:24:09,880 --> 00:24:13,479 Speaker 5: you do, and you have this dramatic expansion, and you're 476 00:24:13,520 --> 00:24:16,440 Speaker 5: at all deposits, in particular their use for the thing 477 00:24:16,480 --> 00:24:18,840 Speaker 5: for which they will become famous, which is trade so 478 00:24:19,119 --> 00:24:22,480 Speaker 5: now most cross border trade or intra European and global 479 00:24:22,480 --> 00:24:25,600 Speaker 5: trade is done in dollars. That's a breton Woods thing. 480 00:24:25,600 --> 00:24:28,800 Speaker 5: We'll talk about breton Woods later, but you essentially have 481 00:24:28,840 --> 00:24:32,040 Speaker 5: to use dollars to do international trade. You often need 482 00:24:32,080 --> 00:24:34,800 Speaker 5: to borrow money to facilitate trade. Trade is very heavily 483 00:24:34,920 --> 00:24:39,280 Speaker 5: dependent on credit. So now you have the beginnings of 484 00:24:39,320 --> 00:24:41,239 Speaker 5: a real like I said, was a real business when 485 00:24:41,240 --> 00:24:43,160 Speaker 5: you're doing a cross border arbitrage, but that goes away 486 00:24:43,200 --> 00:24:46,680 Speaker 5: if enough people do it. Trade is expanding dramatically. The 487 00:24:46,760 --> 00:24:49,679 Speaker 5: world in the late fifties is growing enormously quickly, and 488 00:24:49,720 --> 00:24:51,760 Speaker 5: a lot of that is driven by international trade. So 489 00:24:52,320 --> 00:24:55,080 Speaker 5: the demand for credit to facilitate that trade is growing 490 00:24:55,160 --> 00:24:58,200 Speaker 5: just as fast as the trade itself, and a lot 491 00:24:58,200 --> 00:24:59,760 Speaker 5: of other banks start to get in on the action. 492 00:25:00,000 --> 00:25:02,840 Speaker 5: So what was a London city bank dominated market city 493 00:25:02,840 --> 00:25:06,600 Speaker 5: of London banks becomes really international market based in London. 494 00:25:06,720 --> 00:25:10,439 Speaker 5: So by the early sixties there are a bunch of 495 00:25:10,520 --> 00:25:13,440 Speaker 5: US banks who have opened branches in London to facilitate 496 00:25:13,520 --> 00:25:14,960 Speaker 5: your dollars. They find this to be a good way 497 00:25:14,960 --> 00:25:17,200 Speaker 5: to get around regulation que because I want to pay 498 00:25:17,280 --> 00:25:18,800 Speaker 5: up for deposits, I can't do that in New York, 499 00:25:18,800 --> 00:25:20,160 Speaker 5: I might as well just do it in London. It's 500 00:25:20,160 --> 00:25:22,240 Speaker 5: all dollars at the end of the day. So they 501 00:25:22,280 --> 00:25:25,000 Speaker 5: having branches in London. They're Japanese banks in London. There 502 00:25:25,000 --> 00:25:27,639 Speaker 5: are Continental banks in London. There's euro dollars in Paris 503 00:25:27,640 --> 00:25:31,120 Speaker 5: and Milan. So it's turning into a real global business, 504 00:25:31,320 --> 00:25:34,959 Speaker 5: all in dollars, and so that obviously gets everyone's attention 505 00:25:35,400 --> 00:25:37,720 Speaker 5: and it starts to raise a few eyebrows. And this 506 00:25:37,840 --> 00:25:41,680 Speaker 5: is where people start to notice who are not directly 507 00:25:41,720 --> 00:25:43,520 Speaker 5: involved in the market. It was previously kind of a 508 00:25:43,560 --> 00:25:46,400 Speaker 5: practitioner's market. If you were involved in international trade, fans 509 00:25:46,400 --> 00:25:49,080 Speaker 5: you would know about your dollars, but I wouldn't say 510 00:25:49,080 --> 00:25:51,040 Speaker 5: anyone on the street would know about your dollars now. 511 00:25:51,080 --> 00:25:53,880 Speaker 5: But if you were involved in finance, now you've heard 512 00:25:53,920 --> 00:25:56,159 Speaker 5: of them. That becomes to be more the case, and 513 00:25:56,200 --> 00:25:58,800 Speaker 5: by the late fifties they attract the attention of the 514 00:25:58,800 --> 00:26:02,000 Speaker 5: Federal Reserve, who actually gets an inquiry from a third 515 00:26:02,040 --> 00:26:04,800 Speaker 5: party saying these are interesting, why don't you look into it? 516 00:26:04,960 --> 00:26:08,960 Speaker 5: And so they dispatch a couple of senior officers, Allen 517 00:26:09,000 --> 00:26:12,080 Speaker 5: Holmes and Fred Klopstock. Allen Holmes becomes a sower manager eventually, 518 00:26:12,600 --> 00:26:14,560 Speaker 5: and Fred Klopstock is kind of like this giant of 519 00:26:14,560 --> 00:26:17,159 Speaker 5: international finance, so though he's at the beginnings of his career. 520 00:26:17,480 --> 00:26:19,760 Speaker 5: But senior officers, you know, they run departments and they're 521 00:26:19,800 --> 00:26:20,560 Speaker 5: sent to Europe on. 522 00:26:21,080 --> 00:26:22,440 Speaker 3: I mean, I would love to go in this work trip. 523 00:26:22,440 --> 00:26:25,640 Speaker 5: It's like twelve different European cities and you know, all 524 00:26:25,640 --> 00:26:28,040 Speaker 5: good food places, right, and it wasn't easy to get 525 00:26:28,040 --> 00:26:29,960 Speaker 5: to Europe in nineteen fifty nine. So they go on 526 00:26:30,000 --> 00:26:34,760 Speaker 5: this like barnstorming tour of Europe, basically talking to anyone 527 00:26:34,840 --> 00:26:37,320 Speaker 5: who will take the meeting, A bunch of central bankers, 528 00:26:37,359 --> 00:26:39,280 Speaker 5: a bunch of private bankers, and they come back with 529 00:26:39,320 --> 00:26:42,720 Speaker 5: this big, thick confidential report that is later summarized for 530 00:26:42,720 --> 00:26:45,240 Speaker 5: public use. But they have this big report about you 531 00:26:45,280 --> 00:26:48,360 Speaker 5: know what this thing is, how big it is. They 532 00:26:48,359 --> 00:26:49,919 Speaker 5: don't know, by the way, how big it is. They 533 00:26:49,960 --> 00:26:51,480 Speaker 5: just know it's big. So they know it's at least 534 00:26:51,520 --> 00:26:53,080 Speaker 5: a billion dollars, which back in the day was a 535 00:26:53,080 --> 00:26:53,639 Speaker 5: lot of money. 536 00:26:54,200 --> 00:26:57,399 Speaker 4: Although let's size this a little bit, right, it was 537 00:26:57,440 --> 00:27:00,440 Speaker 4: a billion dollars in say nineteen sixty, which is maybe 538 00:27:00,480 --> 00:27:04,760 Speaker 4: the equivalent of fifty billion dollars today, that's still half 539 00:27:04,800 --> 00:27:07,320 Speaker 4: of a tether. You know, tether is you know, one 540 00:27:07,400 --> 00:27:11,920 Speaker 4: hundred billion dollar basically Euro dollar bank. And so what 541 00:27:11,960 --> 00:27:15,080 Speaker 4: we have is the FED looking into this market when 542 00:27:15,119 --> 00:27:17,640 Speaker 4: it has gotten to the point of being about half 543 00:27:17,680 --> 00:27:20,919 Speaker 4: of the size of tether's balance sheet. So we have 544 00:27:21,119 --> 00:27:23,000 Speaker 4: way more to go in terms of the growth of 545 00:27:23,000 --> 00:27:26,760 Speaker 4: this market subsequent to nineteen sixty. It's still pretty nascent 546 00:27:27,160 --> 00:27:30,040 Speaker 4: in nineteen sixty. It's where some action is in London. 547 00:27:30,440 --> 00:27:34,120 Speaker 4: The policymakers here, they're already on top of this at 548 00:27:34,200 --> 00:27:37,080 Speaker 4: half the size of a tether, and they're off trying 549 00:27:37,119 --> 00:27:38,800 Speaker 4: to get to the bottom of what's going on. 550 00:27:39,960 --> 00:27:41,359 Speaker 5: And so when they come back, as they say, this 551 00:27:41,440 --> 00:27:43,959 Speaker 5: is interesting, and this is interesting in two respects. One, 552 00:27:44,040 --> 00:27:46,399 Speaker 5: is it just weird that you can do this still, 553 00:27:46,680 --> 00:27:48,080 Speaker 5: You can just write a dollar a piece of paper 554 00:27:48,080 --> 00:27:51,000 Speaker 5: and people will take it. But they also more importantly say, 555 00:27:51,640 --> 00:27:53,960 Speaker 5: you know, this makes the dollar more useful. They literally 556 00:27:53,960 --> 00:27:55,639 Speaker 5: say useful in the report. And so the question is 557 00:27:55,680 --> 00:27:58,440 Speaker 5: what does useful mean? And useful in this context means 558 00:27:58,880 --> 00:28:02,160 Speaker 5: you're earning enough interest on this dollar that you're willing 559 00:28:02,240 --> 00:28:05,560 Speaker 5: to hold it as a dollar deposit and on the 560 00:28:05,600 --> 00:28:08,600 Speaker 5: other hand, like you're willing to hold dollars in balances 561 00:28:08,640 --> 00:28:10,480 Speaker 5: instead of spending them immediately, and so like this is 562 00:28:10,480 --> 00:28:14,280 Speaker 5: a short term liquid investment in dollars that is appealing, 563 00:28:14,520 --> 00:28:18,600 Speaker 5: especially to the central banks, which are rapidly accumulating dollars 564 00:28:18,640 --> 00:28:20,440 Speaker 5: through the growth of international trades, so they need somewhere 565 00:28:20,480 --> 00:28:22,320 Speaker 5: to put it. You know, if I'm at central bank, 566 00:28:22,320 --> 00:28:24,320 Speaker 5: I taken a dollar, I can go turn it in 567 00:28:24,400 --> 00:28:27,399 Speaker 5: for gold. If I want gold, I can hold it 568 00:28:27,440 --> 00:28:30,720 Speaker 5: as a dollar, maybe buy treasury security, or I can 569 00:28:30,760 --> 00:28:33,040 Speaker 5: put it in a year dollar bank, and something like 570 00:28:33,040 --> 00:28:36,080 Speaker 5: one out of five of the early year dollars maybe more. 571 00:28:36,359 --> 00:28:37,280 Speaker 3: There's some estimates are. 572 00:28:37,280 --> 00:28:39,680 Speaker 5: Up to forty percent or from central banks themselves, European 573 00:28:39,760 --> 00:28:43,040 Speaker 5: central banks that we're facilitating the market, and so that's 574 00:28:43,360 --> 00:28:48,200 Speaker 5: a way to keep dollars circulating offshore. 575 00:28:47,800 --> 00:28:48,640 Speaker 3: Not in the US. 576 00:28:48,720 --> 00:28:51,160 Speaker 5: So you have a functional dollar financial system, at least 577 00:28:51,160 --> 00:28:54,080 Speaker 5: the beginnings of one that doesn't really touch the US 578 00:28:54,120 --> 00:28:58,640 Speaker 5: financial system. And so that is both interesting but also 579 00:28:59,400 --> 00:29:03,320 Speaker 5: useful in the sense that this becomes an increasingly valuable 580 00:29:03,720 --> 00:29:06,920 Speaker 5: tool because behind the scenes of all of this, we're 581 00:29:06,960 --> 00:29:09,320 Speaker 5: kind of focused on the year dollars themselves, that's not 582 00:29:09,400 --> 00:29:12,280 Speaker 5: the big story here. The big story is the balance 583 00:29:12,280 --> 00:29:14,680 Speaker 5: of payments crisis, which is what they called it, which 584 00:29:14,680 --> 00:29:16,880 Speaker 5: is really just the fact that the US had written 585 00:29:16,880 --> 00:29:18,760 Speaker 5: too many claims on its gold. They'd issued a lot 586 00:29:18,760 --> 00:29:21,360 Speaker 5: of dollars. Those dollars were exchangeable for gold, and now 587 00:29:21,360 --> 00:29:24,240 Speaker 5: there were way more dollar claims on their pile of 588 00:29:24,280 --> 00:29:28,440 Speaker 5: monetary gold than there was gold, and increasingly people were 589 00:29:28,480 --> 00:29:29,520 Speaker 5: turning their dollars in. 590 00:29:29,840 --> 00:29:32,240 Speaker 4: Well before we get to the bread and wood system, 591 00:29:32,320 --> 00:29:35,160 Speaker 4: just on the usefulness of dollars, I think it's helpful 592 00:29:35,520 --> 00:29:40,600 Speaker 4: to reflect on how for ordinary people we take for 593 00:29:40,680 --> 00:29:43,400 Speaker 4: granted the usefulness of the dollar. We don't actually think, 594 00:29:43,400 --> 00:29:46,120 Speaker 4: should I pay for this coffee with yen? When we're 595 00:29:46,120 --> 00:29:49,400 Speaker 4: operating the domestic economy, the dollar is just self evidently 596 00:29:49,520 --> 00:29:52,680 Speaker 4: the useful form of money. But when you're talking about 597 00:29:52,720 --> 00:29:57,200 Speaker 4: international trade and finance, currencies are in legitimate competition with 598 00:29:57,280 --> 00:29:59,720 Speaker 4: each other for uses, and so you know, put your 599 00:29:59,800 --> 00:30:04,240 Speaker 4: core or treasurer hat on of a nineteen fifty's UK 600 00:30:04,480 --> 00:30:08,360 Speaker 4: business engaged in import or export. Part of what Josh 601 00:30:08,480 --> 00:30:13,320 Speaker 4: is illustrating is suddenly the dollar is a more attractive 602 00:30:13,400 --> 00:30:18,160 Speaker 4: currency to use in various ways because you can maintain 603 00:30:18,240 --> 00:30:22,280 Speaker 4: dollar balances at a nearby bank that you've banked with, 604 00:30:22,400 --> 00:30:24,280 Speaker 4: you have a strong relationship with. You don't need to 605 00:30:24,360 --> 00:30:28,280 Speaker 4: have some transatlantic relationship with the New York banks. So 606 00:30:28,360 --> 00:30:33,920 Speaker 4: suddenly there's more transactions that you will do, trade financing 607 00:30:34,040 --> 00:30:38,840 Speaker 4: and actual trade invoiced and denominated in dollars because suddenly 608 00:30:38,880 --> 00:30:41,600 Speaker 4: the dollar is a more appealing currency for you. So 609 00:30:41,680 --> 00:30:44,520 Speaker 4: the dollar's usefulness has grown. And to the New York 610 00:30:44,560 --> 00:30:48,840 Speaker 4: Fed team that is looking into this, they are pleased 611 00:30:48,920 --> 00:30:51,840 Speaker 4: with this development to see that the euro dollar market, 612 00:30:51,880 --> 00:30:57,120 Speaker 4: this nascent development of European sovereigns essentially is actually going 613 00:30:57,200 --> 00:31:01,000 Speaker 4: to be a good thing for the currency that we 614 00:31:01,080 --> 00:31:04,000 Speaker 4: in the United States are creating in terms of its 615 00:31:04,040 --> 00:31:07,440 Speaker 4: competitiveness with other currencies in the global marketplace. 616 00:31:08,120 --> 00:31:10,240 Speaker 5: So the question at this point is it's innascent market. 617 00:31:10,240 --> 00:31:13,920 Speaker 5: It's half a tether, and it's unclear whether or not 618 00:31:13,960 --> 00:31:16,160 Speaker 5: it's become a big, major global actor. We know it 619 00:31:16,160 --> 00:31:19,040 Speaker 5: eventually becomes that. At the time that's super unclear, but 620 00:31:20,080 --> 00:31:23,640 Speaker 5: it becomes eventually and soon the solution to a big problem. 621 00:31:23,680 --> 00:31:25,520 Speaker 5: So your dollars are the solution to a big problem. 622 00:31:25,560 --> 00:31:27,840 Speaker 5: Because in the background of all of this build up. 623 00:31:28,320 --> 00:31:31,640 Speaker 5: There's massive trouble brewing and the whole global edifice of 624 00:31:31,640 --> 00:31:34,920 Speaker 5: the dollar system is starting to crack, and the question is, 625 00:31:35,000 --> 00:31:36,719 Speaker 5: you know, how are we going to save it? 626 00:31:36,840 --> 00:31:37,360 Speaker 3: Or should we? 627 00:31:43,920 --> 00:31:46,360 Speaker 1: That was the first installment of our special three part 628 00:31:46,520 --> 00:31:49,640 Speaker 1: series examining the Origins of Your Dollars. It's so funny 629 00:31:49,840 --> 00:31:53,000 Speaker 1: to hear about the communist origins of Like, here's this 630 00:31:53,080 --> 00:31:55,800 Speaker 1: thing that we hear about every day. They're big in 631 00:31:55,840 --> 00:31:58,920 Speaker 1: the news, et cetera, and it actually had communist origins 632 00:31:58,920 --> 00:31:59,920 Speaker 1: in the nineteen fifties. 633 00:32:00,240 --> 00:32:03,160 Speaker 2: Yeah. In the next episode, Josh and Lev are going 634 00:32:03,200 --> 00:32:07,440 Speaker 2: to continue the story into the turbulent nineteen sixties, with 635 00:32:07,520 --> 00:32:11,760 Speaker 2: that cracking dollar system now morphing into a major campaign 636 00:32:11,840 --> 00:32:15,600 Speaker 2: issue in the race between John F. Kennedy and Richard Pixon. 637 00:32:15,920 --> 00:32:18,440 Speaker 1: Will it be euro dollars to the rescue? Find out 638 00:32:18,480 --> 00:32:19,440 Speaker 1: in the next installment. 639 00:32:19,680 --> 00:32:22,480 Speaker 2: But in the meantime, this has been another episode of 640 00:32:22,520 --> 00:32:25,520 Speaker 2: the Authoughts podcast. I'm Tracy Alloway. You can follow me 641 00:32:25,720 --> 00:32:27,120 Speaker 2: at Tracy Alloway and. 642 00:32:27,040 --> 00:32:29,600 Speaker 1: I'm Joe Wisenthal. You can follow me at the Stalwart. 643 00:32:29,720 --> 00:32:33,360 Speaker 1: Follow one of our special guests, levmanand he's at levmanand 644 00:32:33,880 --> 00:32:36,760 Speaker 1: our other special guest, Josh Younger, He's not on Twitter. 645 00:32:37,120 --> 00:32:40,360 Speaker 1: Thanks to our producers Kerman Rodriguez at carbin Ermann dash, 646 00:32:40,400 --> 00:32:44,200 Speaker 1: Ol Bennett at Dashbot and Kilbrooks at Kelbrooks, and special 647 00:32:44,240 --> 00:32:47,000 Speaker 1: thanks to our sound engineer Blake Maples. From our odd 648 00:32:47,040 --> 00:32:49,680 Speaker 1: loads content, go to Bloomberg dot com slash odd Lots, 649 00:32:49,680 --> 00:32:52,400 Speaker 1: where we have transcripts, a blog, and a daily newsletter 650 00:32:52,720 --> 00:32:54,760 Speaker 1: and you can chat about all of these topics twenty 651 00:32:54,800 --> 00:32:58,160 Speaker 1: four to seven in our discord discord dot gg slash 652 00:32:58,160 --> 00:32:58,800 Speaker 1: odd lots. 653 00:32:58,960 --> 00:33:01,320 Speaker 2: And if you enjoy odd Lots, if you like it 654 00:33:01,360 --> 00:33:04,160 Speaker 2: when we bring you the hidden history of euro dollars, 655 00:33:04,400 --> 00:33:07,280 Speaker 2: then please leave us a positive review on your favorite 656 00:33:07,280 --> 00:33:11,160 Speaker 2: podcast platform. And remember, if you are a Bloomberg subscriber, 657 00:33:11,240 --> 00:33:14,360 Speaker 2: you can listen to all of our episodes absolutely ad free. 658 00:33:14,680 --> 00:33:16,760 Speaker 2: All you need to do is find the Bloomberg channel 659 00:33:16,760 --> 00:33:20,320 Speaker 2: on Apple Podcasts and follow the instructions there. Thanks for 660 00:33:20,400 --> 00:33:26,120 Speaker 2: listening