There Are No Petrodollars, Plus the Focus Misses the Point
AP Photo/Mark Lennihan, File
There Are No Petrodollars, Plus the Focus Misses the Point
AP Photo/Mark Lennihan, File
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There is no such thing as a petrodollar. Yet, the term continues to garner use in today’s discussions about global currencies and financial arrangements. The word is frequently thrown around whenever some oil producing state does something in partnership with another country not named United States.

From a certain, narrow perspective, the mistake is somewhat understandable. The real global currency, eurodollar, has remained entirely in the dark. As so, by the time of the oil embargo in 1973, and the newfound, price-soaked gains redistributed to OPEC, it only seemed like a new currency system had been arranged out of the 1971 ashes of Bretton Woods with oil replacing gold as its commodity center.


The fact that the very idea of the petrodollar keeps going to this day is instead a poignant if inadvertent acknowledgement of the limited monetary literacy provided by the dastardly discipline of statistics-obsessed Economics. We’ve all been left in the dark, and it began that way all the way back decades ago with the very people tasked with being “our” monetary stewards.

Whereas the eurodollar system was already blooming by the early 1960’s, those at the Federal Reserve were caught unprepared and struggled mightily to make sense of its designs, aims, and methods. From their primitive viewpoint, these “dollars” (there weren’t pallets of physical stacks of Federal Reserve notes, merely book entries on a shared ledger system) must have been “exported” by the loud American balance of payments (BoP) deficits.

By importing more merchandise than what had been exported, US-based companies and individuals were obliged, in the aggregate, to send more dollars overseas to pay for the imports than what came back to pay for exports. Many times during those early sixties discussions raising the eurodollar subject, or Euro-currency as it was often written, the FOMC blamed the country’s BoP deficit as its sole source.

The example below from early March 1962 (quoting the FOMC’s Memorandum of Discussion, or MoD) among plenty, a time, it should be noted, barely months following the formation of the London Gold Pool in response to, essentially, a near-complete breakdown in Bretton Woods so soon after its implementation and a very long time before Nixon.

 “Everyone would agree, [Vice Chairman Alfred Hayes] thought, that the basic solution was in remedying the U. S. balance of payments. At such time as it was demonstrated that the United States was doing that, the desire for gold would fade away.”

Rebalance US trade, fewer dollars abroad, the drain of gold reserves “would fade away.” Seemed easy enough.

Yet, at the same time, in fact, the few sentences immediately prior to the above, Vice Chairman Hayes apparently already admitted how, “The holding of dollars had served to promote a degree of world liquidity that could never have been achieved if everyone held gold.”

In other words, Robert Triffin. However they got there, the floatation of so many “dollars” around the world had indeed at that early stage worked to solve what would be called Mr. Triffin’s paradox. Form, therefore, followed the demand function.

Not balance of payments, desire for elasticity, “a degree of world liquidity” Bretton Woods was incapable of achieving. And if that was the case, as it would easily prove to be, then the issue of overseas dollars went way beyond US BoP, having already at such an ancient date become a far more fundamental matter of commercial and financial necessities globally.

This fact would be recited by US authorities quite frequently, too, without the requisite appreciation for how profound this was (with some sympathy for them, given their clear lack of available perspective surrounding what really had been a radical leap). In July 1963, for example, the FOMC again had to acknowledge at least some part of the mechanics behind the evolution:

“…yet in the past few years the treasurers of large corporations had become international operators. They were no longer going to sit by in the same way as 10 or 15 years ago, and the development of the Euro-dollar market to its present magnitude had been a reflection of these activities.”

This budding eurodollar system, however, wasn’t strictly about international commerce, either. While on the one hand, it arose (likely) out of necessity to better grease the wheels of global trade and merchandise exchange, though from its very earliest days it was also intended to intermediate more strictly financial flows, too.

In the BIS’s 34th Annual Report from 1964, the institution put out what might still prove to be one of those all-time understatements, writing, “In addition, some lending of Euro-currencies has clearly had nothing to do with international trade; for instance, some US security dealers and brokers have been borrowing in the Euro-dollar market instead of from banks in New York.”

This was no minor detail, rather proving, not quite a decade after it had started, the eurodollar had already managed to become a complete soup-to-nuts global reserve system. Its reserve-less balances performed the medium of exchange while any number of financial products and opportunities took on desire for store of value functions.

Going back to June 1963, the FOMC MoD from that month further added, “For one thing, there has been a substantial rise in foreign private dollar holdings so far this year, but this appears to be mainly the result of an increase in the liabilities of American banks to the branches abroad, probably reflecting Euro-dollar market activity. Also a sizable part of the deficit has been financed through Treasury borrowings abroad…”

These weren’t separate things; they were each a different outgrowth of the same thing – expanding the eurodollar base as a reserve currency presence outside of the US boundary. This had meant banks were doing their business more and more offshore, including providing (securities dealers) foreign eurodollar participants with the option to “store” some of their eurodollar liquidity in the safety of US government issues.

How successful was all this?

Moving forward a decade, to 1974, again we go back to the BIS. According to its calculations published in the organization’s 44th Annual Report, the “external assets and liabilities in foreign currency of the banks of eight reporting European countries rose by 43 and 45 per cent” in 1973 alone, reaching “$189 and 191 milliard respectively.” (A milliard is a billion.)

Back when a billion meant something, nearly $200 billion was discovered from a survey of larger banks in just eight European nations.

This had already put to rest the BoP explanation, too, along with another so-called solution floated (pun intended) by Bretton Wood’s official end in August 1971. The Nixon Administration was led to believe the Great Inflation, already burning for more than half a decade by then, could be solved by allowing currency exchange rates to float, thereby allowing the BoP problem to get resolved outside the formal gold-exchange framework.

The BIS poured tons of cold water all over that one, giving up on it by 1974, “Contrary to what had frequently been expected, floating exchange rates and the shift of the US balance of payments from deficit to surplus do not seem to have exerted a major drag on the [eurodollar] market. In fact, even after allowance is made for purely seasonal influences, its growth appears to have accelerated in the second half of 1973.”

That’s because the eurodollar was never really a “market”, it was a radical departure in the world’s monetary system born from immediate necessity, a globally important task indirectly left for the world’s bankers to solve (or, better said, left open for them to see if they could), and then set free to experiment upon what was essentially a blank canvas (the unregulated offshore environment).

And you’d think common sense might have prevailed here. Economists and central bankers, who the public was always led to believe were/are the money experts, someone somewhere might have been able to put two and two together, a really easy connection from how uncontrolled monetary experimentation just maybe, might have something to do with that whole Great Inflation thing otherwise unfixable by every other means, left unexplainable by all previous efforts.

For one, these eurodollar bank operators just kept inventing new kinds of money/credit as time went on. The BIS in ’74 also found, “Another device that proved highly effective was the technique of loan syndication, i.e. the sharing-out of a loan between a fairly large number of banks. This served to remove virtually all limitations on the size of loans which could be handled by the market.”

Such high capacity for dollar-denominated global finance had come in handy when, the year prior from this report, suddenly oil prices spiked and oil producers found themselves with a windfall gain.

“This absorptive capacity [eurodollar loan syndication] was of particular importance in 1973 because of increasing recourse to the Euro-currency…together with the increasing volume of borrowing for the financing of large energy-related projects.”

According to BIS calculations in 1975 (the 45th Annual Report), reported reserves by oil exporting nations had surged by a walloping $34.4 billion in 1974, compared to gains of just $3.2 billion and $4.4 billion, 1972 and 1973 respectively. All this had represented was a redistribution, the taking away from oil importing countries; these latter had reported increases in reserves of $20.1 billion in 1972, $15.3 billion in 1973, but just $1.8 billion for 1974.

Of that huge $34.4 billion for oil exporters, “the great bulk of their reserve gains was placed in the Euro-currency market” as was standard practice by then. The eurodollar system then re-redistributed (along with creating more “dollars” from nothing) some of it back to the suffering oil import nations along with selling the Saudis and other OPEC beneficiaries a whole bunch of safe, liquid US Treasury assets (along with more risky financial opportunities) by which to store some of their eurodollar surplus.

Dr. John R. Karlik would in February 1977 tell Congress’s Joint Economic Committee, as its Senior Economist, how there really wasn’t anything overly special about it:

“The Eurocurrency market provided a vital service in accepting large deposits from oil producing countries and lending the funds to hard pressed oil importing nations. Developing countries contending with increased energy and food costs and, subsequently, with a drop in earnings for their own commodity exports, have been especially aided by credits obtained in the Eurodollar market.”

No, there is no such thing as a petrodollar; there never was. These events did not create an entirely new currency, as the petrodollar term alleges, rather a few new entrants into the wealthy national club were welcomed into the existing and by-then well-established global eurodollar framework.

The existing eurodollar network - offshore bank-centered reserve-less money – merely extended oil producers the same full-range capacities that it had developed over nearly twenty years of massive, unrecognized expansion (qualitative as well as quantitative) before 1973.

The conspiracy of silence, as Paul Einzig had called it in 1965 when chronicling much of its earliest eurodollar operations, extended to one official mistake after another combined with the inability to make the intuitive leap required to see what was really going on outside the traditional worldview.

Even after recognizing the importance and necessity of the eurodollar system, and not just in the oil episodes of ’73 and ’74, Dr. Karlik would still testify to the JEC that there wasn’t, in his view, any connection between it and the Great Inflation.

Karlik wasn’t just a Senior Economist for that body, he had just before been a Senior Economist at the Federal Reserve. At that time, the Fed (very wrongly) has continually blamed fiscal deficits for the never-ending inflationary disaster, insisting there was no connection between oversupply of currency and uncontrolled consumer prices. No one in position of authority working there was ever going to finger the most obvious suspect of runaway external monetary expansion, even if at some point anyone ever did come to grips with enough of it.

From these long shadows over the eurodollar money, the error of the petrodollar goes uncorrected along with much, much more pressing mistakes – only starting with how the vast majority of the world still believes we get dollars from the Federal Reserve.

That, too, forms the basis of most petrodollar petulance; that oil producers are increasingly unnerved by all the Fed’s (or the feds’) supposed money printing about to destroy the US dollar, and so they diligently contribute to its demise by engaging in parallel payments arrangements (usually tied to the Chinese and Russians).

Saudi Arabia’s problem(s) isn’t the dollar’s potential value, it is again the blind spot over the eurodollar. Whereas the public knew nothing about what really happened in 1973 when the network had easily, near-seamlessly offered the oil giants its major currency capacities, fewer, actually, today realize the same network, nor how that network no longer can offer the same capabilities.

Too many “eurodollars” by the seventies; too few since 2007. The conspiracy of illiteracy surrounding both. That’s everyone’s problem today, including Russia, China, and even Arabia’s Saudis.

And it is absolutely the Fed’s problem, too, if for vastly different reasons. While oil prices are again a huge problem, even to the point of contributing to possible, perhaps likely recession in 2022 like 1973, this time, though, it would be without any underlying inflation. Oil just isn’t, nor has it ever been, the world’s monetary connection.

That’s the eurodollar job. Too much, too little, and a whole lot in between still stuck in the shadows. 

Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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