In the late 1960s, Sigmund Warburg fundamentally reshaped global finance by creating the Eurodollar market. This system emerged when significant amounts of US dollars were deposited in commercial banks outside the United States, especially in London. Traditionally, these dollars were exchanged for pounds through the Bank of England, inflating the UK’s money supply while boosting the Bank’s foreign exchange reserves. Warburg innovated by enabling British banks to lend these dollars directly to international borrowers instead of converting them.
Jacques Rueff, a leading economist, identified the inflationary risks of this mechanism, dubbing it a “double pyramid of credit”:
- Domestic Credit Expansion: US budget deficits created dollar deposits that were multiplied through the fractional reserve banking system.
- International Credit Expansion: US current account deficits generated unregulated international deposits, which were amplified through an international banking multiplier.
Ultimately, these dollars returned to US-domiciled banks, allowing American regulators to retain oversight. Rueff highlighted this mechanism’s inflationary nature in his 1971 book The Monetary Sin of the West. His warnings were validated when rising oil prices in 1973 triggered a decade-long “great inflation,” culminating in Paul Volcker’s stringent monetary policies.
The Emergence of the Asiadollar Market: A Modern Parallel
Subscribe!