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a global reserve currency. The global reserve issuer, as an international liquidity provider, would need to take into account financial conditions in all countries around the world, whereas a national central bank's mandate and allegiance are purely domestic.

It took two years of sometimes heated negotiations between the British and the Americans before the representatives of 44 nations finally, in July 1944, congregated on the Mount Washington Hotel in Bretton Woods, New Hampshire to ratify the historic international agreement. The Bretton Woods conference itself was largely a formality, since most of the terms had been hammered out beforehand. The three-week event had a jovial atmosphere about it, fuelled by the flow of alcohol. The countries taking part included an eclectic mix of Allied Powers, governments in exile, British colonies, and emerging markets. Some were just happy to be there, without really understanding much of what was going on.

      America's far stronger negotiating position meant that, on almost all key elements, White's proposal prevailed over the Keynes plan. Even so, Harry White took painstaking care to choreograph every detail of the conference to ensure that the dollar-based monetary order that he had advocated was ratified. History would later vindicate Keynes’ reservations about the White plan, however.

The Bretton Woods system would ultimately break down amidst the Vietnam War, when US deficits made the dollar fix to gold no longer tenable. By that time though, the dollar had already been firmly embedded at the heart of the global monetary system and, after the gold standard was abandoned in 1973, the dollar itself simply supplanted the role of gold in the global monetary hierarchy. Harry White was to die in 1948 under the shadow of a Congressional investigation into his espionage activities on behalf of the Soviet Union. Despite his vehement denials, later revelations from both US and Soviet archives confirmed that he had been passing sensitive information to the Russians since the 1930s.³⁰ Nevertheless, he had undeniably achieved for the dollar a feat of financial alchemy that sterling had never accomplished in its century as the leading global reserve currency.

Bretton Woods ushered in a long period of growth and prosperity in the 1950s and 1960s. The dollar's special status under that system enhanced its role as a currency of lending and borrowing in international markets. Under the previous gold standard, a dollar that flowed out of the US represented a unit of gold outflow that would reduce the lending capacity of the US banking system. However, under the Bretton Woods system, a dollar that left the country had a high probability of finding its way back into a deposit at a US bank, amplifying the amount of credit that US banks could lend out. This should have placed New York at the centre of this international dollar market. However, through a remarkable confluence of circumstances and opportunism, the financial centre that won out was not New York, but that familiar financial capital of the old world: London.

A British Innovation

If governments had laid the foundation at Bretton Woods, it was markets that then took over the next phase of the construction of the dollar's towering role in global finance. It was in capital raising and investment that the dollar would come into its most widespread international use. The spread of the dollar as the dominant currency of international borrowing and investment provided the channels for worldwide transmission of US financial and monetary policies. Further, the dollar-based globalisation of financial markets spurred the development of networks and infrastructure that would give the US unprecedented geopolitical power in the financial sphere. It is therefore all the more surprising that this market for the offshore dollar – otherwise known as the ‘Eurodollar’³¹ – developed almost entirely outside the purview of American regulators.

      The origins of the Eurodollar market are somewhat murky, as there were no published statistics on it until 1963. Although customers had long been allowed to deposit US dollars and other currencies at banks in London and such deposits had been growing during the interwar years, the birth of the Eurodollar market is generally acknowledged to have been in the 1950s. A number of factors contributed to its evolution.

In the immediate aftermath of WW2, the industrial base of Europe was either destroyed or had been given over to the manufacture of war supplies. Due to its geographic position, the US had been spared much of this destruction and had seen its economy grow to account for roughly half of global GDP. US exports were in strong demand and the need to pay for these in dollars meant that the rest of the world faced a dollar shortage. Through Marshall Plan aid, the US injected $17 billion into Europe in the form of reconstruction grants. Around $4.4 billion in similar aid was given towards the reconstruction of Japan.³² Between 1947 and 1958, the US encouraged the outflow of dollars in order to provide liquidity to the international economy and, from 1950, began running a balance of payments deficit. As the post-war recovery took hold, offshore dollar balances began to accumulate. Initially, these were deposited with European banks, which in turn placed them back into the US banking system via their US branches, subsidiaries or correspondent banks.

With the rise in Cold War tensions, the Soviet Union and countries within the Eastern bloc became concerned that the US government might confiscate or freeze their dollar deposits, so they began to transfer these holdings from New York to London and Paris. The first such transfer by the Soviet Union was to the Paris-based Banque Commerciale pour l'Europe du Nord, which had the telegraphic address ‘Eurobank’. It is said that the term ‘Euro-dollar’ traces its origins to this.³³

There were other attractions to holding dollar deposits offshore, however. Offshore dollar deposits were not subject to US reserve requirements that forced banks to hold a certain proportion of their deposits in non-interest-bearing accounts with the Federal Reserve. Furthermore, Eurodollar deposits fell outside the jurisdiction of the Federal Reserve Board's Regulation Q, which was promulgated in 1933 to avoid the excessive competition that had been deemed partially responsible for bank failures during the Great Depression. Between 1935 and 1956, Regulation Q capped the interest rates that US banks could pay on deposits to one percent for 30-day deposits and to 2.5 percent for 90-day deposits.³⁴ Therefore, so long as offshore banks could lend the dollars out at market rates, they could afford to pay higher interest rates to depositors than domestic US banks.

An innovative product offering by a British bank also played a key role. Britain had devalued the pound by 30 percent in September 1949 under the weight of its balance of payments deficit but began loosening exchange controls that had been imposed at the outset of the war in the early 1950s, in line with the Bretton Woods objective of freer global trade. In 1954, restrictions on British banks operating in the forward exchange markets were lifted. When, in 1955, sterling interest rates were raised above US rates, a profitable opportunity opened up for arbitrage between sterling and dollar interest rates. Midland Bank, one of the major British clearing banks, began offering 1⅞ percent on 30-day dollar deposits, or ⅞ percent above the Regulation Q capped rate of one percent. It then sold the dollars in the spot market³⁵ and bought them back in the forward market for a premium of 2⅛ percent, giving Midland sterling funding at 4 percent (1⅞ percent plus 2⅛ percent) versus the prevailing Bank Rate of 4.5 percent.

The Bank of England initially raised some concerns at the rapid growth in Midland's foreign currency deposits, which appeared unrelated to its commercial transactions, but decided not to restrict the activity. Maurice Parsons, who later went on to become deputy governor from 1966 to 1970, rationalised that ‘it is impossible to say to a London bank that it may accept dollar deposits but may not seek for them.’ Threadneedle Street's³⁶ sanguine attitude towards Midland's innovation was likely influenced at least in part by the beneficial impact of these dollar inflows on Britain's balance of payments position – in June

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