Home NewsEconomy The mystery of the Big Bang… of finance (III)

The mystery of the Big Bang… of finance (III)

by Jacques Trauman

OR how the Eurodollar market was born


In a previous article (cf. The Mystery of the Expansion of the Universe… of Finance, Click), we exposed how the London Eurodollar market had literally exploded in the 1960s / 1970s, ensuring the pre-eminence of the City of London.

But by the way, what is the Eurodollar market? By what mystery was born this market intended to dominate, for a time at least, the international financial markets?

It was born somewhat by accident, the product of a peculiarity of the exchange of goods and money in the Middle Ages.

Italian bankers, and in particular the Lombards, had invented as early as the 13th century, double-entry accounting, which requires assets and liabilities on the balance sheet to be strictly equal and whose effects we have seen on the banks until our days.

This accounting system was very practical and it worked perfectly. It has certainly improved since then, but we have never actually changed it.

One of the consequences of this system is that the world is interconnected by a network of banking correspondents which, like a dense and giant spider web, connects all the banks in the world. Each bank has, in each country where it is installed, one (sometimes several) bank correspondent which allows it to carry out transactions in the currency of the country where this correspondent is installed.

Let’s take an example :

A Russian exporter, the company Petrovich, exports gadgets to the United States, gadgets which are bought by the company Blunt, located in New York. The amount of the transaction is, say, $ 100,000.

Question:

How does Petrovich get paid the $ 100,000?
Petrovich has an account in a Russian bank, the TCR bank.
The TCR bank has a correspondent in New York, the Manhattan Bank.
For its part, Blunt has an account in a New York bank, the First Commercial Bank.

Reply:
To pay the $ 100,000 it owes, Blunt will order its bank, the First Commercial Bank, to credit this amount to Manhattan Bank, TCR correspondent in New York.
Therefore:

  • The First Commercial Bank will transfer $ 100,000 to the TCR bank account at Manhattan Bank, New York. Capital point, the payment is made but the dollars DO NOT LEAVE THE United States!
  • So that Petrovich can dispose of these $ 100,000, the TCR bank then opens a dollar account for it or credits its dollar account if it already has one.

Conclusion:
Again, the Dollars have not left the United States, but through a mirror account game, Petrovich will be credited in foreign currency to its account domiciled in Russia.
And so it is with all currencies, Euros do not leave Europe, Sterling does not leave the United Kingdom, etc.

Now let’s go back to 1951, the days of the Soviet Union and the Cold War.

Russia had a bank in Western Europe, the Commercial Bank for Northern Europe, or BCEN, or Eurobank (due to its telex code). The BCEN had, among other locations, an agency in London which centralized all payments related to Soviet exports, in particular to the United States.

As a result, she had large dollar deposits – like most London banks – but of these dollars, she did nothing. It was then that the management of the BCEN in London had a brilliant idea: why not use these “dollar scales” which were useless, and why not lend them to companies. What was done.

Of course, the other banks located in London, seeing this, found the idea excellent, and did exactly the same thing: thus was born, almost by accident and in any case inadvertently, the market for eurodollars (named BCEN or Eurobank), which assured the pre-eminence of London. And this is how the Soviets participated effectively, without even thinking about it, in the development of the oh so capitalist market of the place of London!

In a previous article, we praised the American regulator who, by his stupid decisions, had conscientiously undermined the financial center of his own country. Let us now thank our Soviet comrades for their precious contribution to the building of international capitalism.

We were then in a period of inflation, and a debate raged on both sides of the Atlantic: did the Eurodollars fuel the money supply and therefore inflation? Obviously, the answer seems to us to be yes, since the same dollars are counted twice, once in the United States, once in Europe. But let’s leave this debate to the economists who did not fail, at the time, to insult each other in Europe as elsewhere in the United States.

The blessed times of the Cold War, a time when we could easily determine who was friend and who was enemy, being far behind us, the big and small financial demons adapted: we stopped talking about the market Eurodollars, but financial instruments dating back to the 17th century have been brought back into fashion: derivatives, equity derivatives, swaps, options and other subprimes, which have amused traders for several decades.

However, the Evil One is subtle. Seeing himself unmasked, he changed strategy and now attacks from another angle. Disguised as a harmless and benevolent lamb, he is now the friend of the people and the central banks, pushing deficits and debt without seeming to touch them. However, the network of correspondents is still there and still leads today to incredible imbroglios. When the United States imposed a record $ 9 billion fine in 2014 on BNP Paribas for violating the embargo imposed on Cuba, Iran, Sudan or Libya, it is because the incriminated transactions, carried out in dollars, were compensated in dollars on the American territory.

Yes, even if the transactions do not involve the United States, the dollars never leave their territory of origin …

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