How IT Came to Rule the World, 2.2: Eurodollars, Petrodollars

Posted on | June 22, 2010 | No Comments

How did this world of global digital monetarism emerge? How did fluid capital transcend the containment policies and boundaries erected in the period up to 1970s to develop in the 1980s and beyond into a global financial environment?

While origins are often difficult to delineate, the phenomenon of “eurodollars” – US dollars outside of the geographical boundaries of the United States – bare scrutiny. US currencies, real and numeric, began to increase in the post-WWII years as US military commitments and commercial investments grew in Europe and later Asia. Legend has it that the name came about when a Russian bank, trying to avoid confiscation, parked its dollars in a French bank with a telegram address of “eurobank”. US banks during the 1960s, also moved money offshore to avoid regulations under the Kennedy and Johnson administrations. But it was the oil crises of the 1970s that dramatically increased the amounts of US dollars overseas. Known as “eurodollars”, these were US denominated (though not sanctioned) currency held outside America’s borders.

Late 1973 marked the beginning of the first oil crisis, an event that would contribute substantially to a surplus fund of supranational electronic money. Untethered from gold, the value of the dollar dropped appreciably after Nixon “closed the gold window” in 1971, raising concerns by the oil-producing countries and other countries selling goods and services for dollars. Political instability increased when war broke out in the Middle East as Egypt and Syria, supported by a coalition of Arab states conducted a surprise attack on Israeli. Caught by surprise, and mired by the Watergate investigation, the White House supported Israeli and increased their defense condition from DefCon 4 to DefCon 3, provoking the USSR and nearly causing a nuclear conflict. OPEC countries boycotted the U.S and other western countries to punish the supporters of Israel. As oil prices quadrupled, US dollars, the only accepted currency in the oil markets, poured into OPEC countries and were subsequently deposited into the major banks of the international financial system.

Seeking profits, banks began investing heavily in computer communications to help recycle OPEC funds to Third World countries and other countries eager for the money. Information technologies became helpful as banks decided to form syndicated loan networks to spread their lending risks. A lead bank would arrange the funding and supply a major share of the loan while contacting a number of other banks to contribute smaller amounts to the loan. The telegraph system was slow and clunky though and soon these processes were computerized with word processors and data communications, leading to increasing pressure by banks and other transnational companies for a more efficient global telecommunications system.

By the early 1980s, many of the countries accepting these petrodollars began to run into financial difficulties leading to the infamous “Third World Debt Crisis” that rocked places like Mexico, Poland, and New Zealand. This led to major austerity programs as the IMF was retasked by the Reagan administration to approve further loans based on “structural adjustments” that would lead to more open markets for capital and information flows as well as trade. One of the major targets was government controlled and/or owned telecommunications systems, leading to their privatization, and arguably the global Internet and the modern realm of digital monetarism.

Starting with euro/petrodollars that were freed from the Bretton Woods constraints by President Nixon, a global system of computerized algorithmic financial trading emerged. This has morphed into complex high volume markets for an array of financial instruments. Floating in secret “dark pools” of electronic mirth, highly leveraged assets and debts are transacted across the globe. These include currency derivatives, stock index futures, CDOs and other computer based financial instruments.

Anthony J. Pennings, PhD has been on the NYU faculty since 2001 teaching digital media, information systems management, and global communications.

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