Eurodollars to the Rescue

Abstract

A MERICAN dealings in international finance in the past decade are generally considered to add up to a narrowly-avoided isaster. Spending more abroad than we have taken in, we have been forced to make up the difference by paying out our gold and by going heavily into debt to foreigners. Fear lies heavy on the financial community that the dollar may come tumbling down, bringing the whole international monetary system with it. Already foreigners have three times as much in liquid claims against us as we have gold to pay, and the gap grows larger as our adverse balance of payments continues. There are many who wonder why catastrophe has not already overwhelmed us in the form of a run on our gold by fearful foreign creditors. Yet we have not been crushed, and if we look in the right direction we can detect the light breaking through the threatening clouds of monetary gloom. Why has there been no rush from foreigners to cash in their claims for gold while it is still available? One answer lies in an unexpected quarter, in the recentlydeveloped Eurodollar system. Foreigners use dollar balances in the United States as a sort of super-currency which is borrowed and lent among themselves and which is often lent to Americans. All this activity has been vastly lucrative to holders of dollar balances, and there have been other benefits as well. So why should foreigners give up the interest income and convenient financing of Eurodollars for sterile gold which yields no income and requires expensive safekeeping? The answer has been clear: foreigners prefer to hold on to their dollar balances in the United States as the basis of the Eurodollar system. Eurodollars are dollars deposited in foreign banks. This is possible because bankers abroad keep accounts in all kinds of money. There are Europounds and Eurofrancs as well as Eurodollars, all part of a wider system known as Eurocurrencies. Eurodollars, however, are by far the largest and most active part of the system. Eurodollars come into being as deposits by some person, company or government that has a claim on a dollar balance in the United States. The claim is transferred to the foreign (usually London) bank by the act of deposit. The commitment in most cases is a time deposit on which the bank pays interest to the depositor. The bank must earn revenue in order to pay this interest so it lends the dollar to someone else at higher interest rate than it pays, earning a fee in the process. Depositors may be Americans seeking safety in Swiss bank accounts. Or they may be Europeans who have received dollars from American tourists or importers. Even central banks and the Bank for International Settlements have deposited dollars in London or other European banks when there were not enough dollars otherwise to keep the Eurodollar game going. One fact stands out: there have been an increasing volume of dollar deposits from a wide variety of sources to supply Eurodollars. Borrowers may be American banks who need funds for their operations at home. Eurodollars are dollars; to an American bank they look just like other dollars and can be used to restore required reserves at the Federal Reserve banks or to lend to American business. A substantial portion of Eurodollar loans are made by foreign branches of U. S. banks to their home offices. Foreign subsidiaries of U. S. industrial corporations have been large borrowers of Eurodollars, as have foreign banks and even foreign governments. One might ask why all the trouble to use Eurodollars when borrowers might go direct to American banks and borrow dollars. One answer is that the American banks may not have enough dollars to lend, and what little they LEONARD W. ASCHER is Professor of Finance at the University of Hawaii. He is the author of Survey of Accounting, a textbook published in 1951, and has been a frequent contributor to the Financial Analysts Journal.