Eurodollars

A Euro-Dollar is a Dollar issued outside out the US. Do not let the “euro” part of the word confuse you. Because for decades some of the biggest issuers of such currency where located in Europe, most people in Finance started referring to such currencies as “euro-dollars” or “euro-yens” and so the term stuck.

The Eurodollar system is a peculiar and quite odd story in every imaginable way. It arose in the 1950s but no one really can say for certain. There is a book called “Euro-dollar System:Practice and Theory of International Interest Rates” by Paul Einzig which might constitute the first official mention of eurodollars.

Anyway, the term, as we said, refers to dollars that are issued off-shore. That means those are dollars completely outside of the purview of the Federal Reserve. This is a very very important thing to realize. A Central Bank is supposed to have complete jurisdiction and authority of the issuance and regulation of a certain currency. However, everyday, everywhere in the world there are currencies that are issued outside of a central banks jurisdiction and they circulate in the global economy.

A lot of sensational articles have been written about the “shadow banking system” and other such clickbaity topics, but the eurodollar system is a real “shadow baking system” in plain sight. It is not legal or illegal because there are no laws written about it. Because it has evolved for decades without any legal framework to regulate it, it has grown to be something incredibly complicated and very hard to even track since, again, there is no official way to do so.

This is something that greatly undermines the power of the Federal Reserve to pursue its mandates. In many cases it is yet another chink in the Central Banks’ armor. Another issue that ever so diminishes their claimed great power over the economy.