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It makes the world go round -

The global money system consists of governments, financial institutions, and trade systems that make the world go round.

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Global monetary system -

What makes up the global monetary system? Currencies, the foreign exchange market, trade, investments, banks, and international organizations.

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What shapes the system? -

Key factors like technology, globalization, policies, and political contexts shape the system and affect its ebbs and flows.

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Money flow -

Money flows between countries and markets, goods and services are seamlessly exchanged, and investments are made.

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Bretton Woods -

So how did we get to this? Years of discussions culminating toward the end of World War II led to a meeting of the United Nations, then consisting of 44 countries, in Bretton Woods, New Hampshire, in 1944.

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Global central bank needed -

John Maynard Keynes (pictured right), then-adviser to the British Treasury, argued that a global central bank was necessary as an authoritative entity to manage imbalances between nations and economies.

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Combatting rigidity and fostering cooperation -

Attendees of the meeting urged the creation of a global monetary system that avoided the rigidity of the former system and fostered cooperation among the countries. This remains the reference point of our current monetary system.

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Formation of IMF and World Bank Group -

This meeting established the formation of the International Monetary Fund (IMF) and the World Bank Group, which provided post-WWII funds for reconstruction and development.

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American dollars -

International balances were conducted in American dollars, and US dollars were convertible to gold at a fixed exchange rate ($35 for an ounce of gold).

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Foreign-held dollars exceed gold stock -

This system, known as the Bretton Wood system, was fully operational. That is until foreign-held dollars exceeded America’s gold stock. How did that happen? 

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Eurodollars -

Eurodollars, also called offshore dollars, are funds that businesses deposit in banks outside the US. They actually have nothing to do with the Euro or with the EU. They’re just funds used for international trade.

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Telex handle -

The Eurodollar far predates the Euro. It comes from a telex handle of one of the first banks to use offshore funds (to lend and borrow) between non-Americans and/or businesses that have no or limited connection with the US.

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International trade -

What makes these dollars so attractive? Their use in international trade is convenient because they aren’t regulated by US authorities. They’re less limited in their global market use.

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Post-WWII -

After World War II, the US had a lot of control over the dollar. Businesses started placing their US dollars in European banks to avoid American oversight, so they could conduct transactions without the control of the US government and avoid the risk of sanctions.

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Shadow banking -

In the 1970s, financial institutions and governments alike began using this kind of “shadow banking” to conduct money laundering, tax evasion, and other shady financial practices.

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Corruption -

This provoked a massively unregulated cash flow that brought up debates on corruption and financial instability. In fact, Eurodollars were a significant contributor to the devastating 2008 financial market crash.

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Blends various insights -

Understanding the Eurodollar system and its role in the global financial system is important because it “blends commercial imperatives, macroeconomics, and geopolitics.”

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Dollars tied to gold -

It’s important to underline again how dollars in the US financial system in the 1960s were “claims on American’s holdings of gold.” Meaning, dollars in the US were tied to gold; $35 per ounce of gold, as previously noted.

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Pressure on US gold reserves -

Pressure on the “core of the global money system,” namely the US gold reserves, started mounting. Whereas the offshore dollar business was, essentially, self-sustaining.

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London Gold Pool -

US gold reserves fell to $10.7 billion by 1968. The crisis forced the US to restrict gold sales to central banks. All other purchases were made at higher rates through the London Gold Pool.

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Nixon suspends exchange -

By 1969, France and Germany both devalued their currencies. The pressure on the US gold reserves was overwhelming. In 1971, then-American President Richard Nixon suspended the exchange of dollars to gold.

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Reset Bretton Woods -

Shortly after, global monetary actors and authorities met in Washington, DC, to reset the Bretton Woods system to create an effect of dollar devaluation of about 11%.

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Inflation and gold skyrocketed -

The plan wasn’t bold enough for the crisis that loomed. In 1972, inflation and gold prices skyrocketed. The dollar was further devalued by another 10%. Inflation soared even higher.

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System couldn't hold itself -

This cycle kept going until the system couldn’t hold itself. Internationally fixed exchange rates were clearly a failure, leaving all currencies floating.

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What's a floating currency? -

What does it mean to say a currency is floating? Rather than being controlled by a nation’s government or central bank, it’s subjected to supply and demand market forces.

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Liquidity in dollars -

To further legitimize the Eurodollar system, US financial authorities allocated the system a great deal of support. In fact, they offered liquidity in dollars to offshore banks.

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Stablecoin -

Experts argue that cryptocurrency can offer some competition to the Eurodollar, particularly stablecoin. Stablecoin is considered, as its name indicates, the most stable cryptocurrency on the market due to its ties to either a currency (US dollar, typically) or a commodity (such as gold).

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Stablecoin -

Although stablecoin is only a rather small player in the crypto context compared to other cryptocurrencies, it ends up serving a role akin to Eurodollars in the financial global trade market. Stablecoins, much like Eurodollars, are exchanged at par with the US dollar, supposedly without the risk of depreciation.

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Too big to fail -

Historian and economist Adam Tooze argues that the Eurodollar system, however, is too big to fail, not only because of institutional entanglement, but relevant historical context.

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