Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

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

Posted on | June 22, 2010 | No Comments

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

While origins are often difficult to delineate, the phenomenon of “eurodollars” – US dollars held 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 of the errant currency came about when a Russian bank, trying to avoid confiscation of its foreign assets as the Cold War escalated, 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. It was the oil crises of the 1970s that dramatically increased the amounts of US dollars overseas.

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 had dropped appreciably after Nixon “closed the gold window” in 1971, raising concerns by the oil-exporting 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 Israel 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, sometimes called “petrodollars.” A prime target was “Third World” and other countries eager for the money. Sometimes pressured by “economic hit men,” countries took loans for infrastructure projects, paying for oil, and sometimes to stash away in private accounts.

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 significant share of the loan while contacting many other banks to contribute smaller amounts to the loan. However, the telegraph system needed to be faster and smoother, and soon, these processes were computerized with word processors and data communications. This move toward the automation and globalization of Eurodollars led to increasing pressure from banks and other transnational companies to create a more efficient global telecommunications system.

By the early 1980s, many countries accepting these petrodollars began to face financial difficulties, leading to the infamous “Third World Debt Crisis” that rocked countries like Mexico, Poland, and New Zealand. The crisis led to major austerity programs, as the Reagan administration retasked the IMF with approving additional loans based on “structural adjustments” that would lead to more open markets for capital and information flows as well as trade.

One of the primary targets of the structural adjustment was government-controlled and/or owned telecommunications systems, leading to their deregulation and, eventually, privatization in liberalized telecommunications markets. This led to further pressure to reduce barriers to international flows of data and capital, and arguably the global Internet and the modern realm of digital monetarism.

Starting with Eurodollars in the 1950s, US-denominated (though not sanctioned initially) money held outside America’s borders, a new system of unfettered capital and transborder data flows emerged. Further freed from the Bretton Woods constraints by President Nixon, a global system of computerized and algorithmic financial trading emerged. This phenomenon 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.

Citation APA (7th Edition)

Pennings, A.J. (2010, Jun 22). How IT Came to Rule the World, 2.2: Eurodollars, Petrodollars. apennings.com https://apennings.com/how-it-came-to-rule-the-world/how-it-came-to-rule-the-world-2-2-petrodollars/

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AnthonybwAnthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University where he taught comparative political economy, digital economics and traditional macroeconomics. He also taught in the Digital Media MBA at St. Edwards University in Austin, Texas, where he lives when not in the Republic of Korea.

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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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