Eurodollars, two wars, recycling

“The peak post-war year for the American economy, relative to the rest of the world, was 1968, when American industrial production was more than one-third (34 per cent) of the world total. It was also the climax of the American global paramountcy, the year of Lyndon Johnson’s agony, the point at which the combined burden of foreign and domestic spending became too great to bear. Thereafter all was decadence. And with America’s relative economic decline came a progressive softening of the dollar as a reserve currency. This inevitably undermined the Bretton Woods arrangements. From the late 1960s Washington ceased to control the world monetary system.

To some extent it ceased to control its own currency since the 
quantity of unrepatriated dollars — what de Gaulle stigmatized as 
'America's export of her own inflation' - now reached catastrophic 
proportions. The age of the dollar was over. The age of the 
Eurodollar dawned. 

As long ago as 1949 the Communist Chinese, fearing America 
might block any dollars they earned, decided to keep their dollars 
outside the US in a Soviet Paris bank. Its cable address was 
'Eurobank' - hence . the term Eurodollar. America first went into 
deficit in 1958, and thereafter the flow of dollars into Europe 
increased steadily. A British financier, Sir George Bolton, of the Bank 
of London and South America, now grasped the idea that here, for 
the first time, was a currency growing up outside national supervi- 
sion, an expatriate currency capable of providing colossal amounts 
of credit. He made London the centre of the new Eurodollar 
system. 18 The Eurodollar market tripled in 1959 alone; doubled 
again in 1960. Attempts by Kennedy to break it up by controls 
merely boosted its attractiveness. Similar measures by European 
governments were equally counter-productive. It was a good exam- 
ple of the way in which the market defies the suppressive puritanism 
of governments and world agencies. As Walter Wriston of New 
York's Citibank put it, the Eurocurrency market was 'fathered by 
controls'. It was, in fact, a kind of black market world financial 
system. Freed of government interference, it was able to make the 
maximum use of the new electronic communications devices which 
became available in the 1960s and 1970s. To quote Wriston again: 
'Mankind now has a completely integrated international financial 
and information marketplace, capable of moving money and ideas to 
any place on this planet within minutes.' (19) ( source notes are absent.)

But of course the Eurodollar market, the product of American 
inflation, was itself highly inflationary. It reproduced some of the 
worst features of the 1920s New York money market, especially in 
its international loans. It increased the volatile nature of money, 
stacked up credit in multiple tiers of borrowings, thus creating 
'dollars' which did not exist. 20 Eurobonds and Eurocredits were 
invented. All the world's major banks came into the market, and 
formed syndicates to handle loans to governments on a scale never 
before imagined. The first Eurodollar syndicated loan was to the 
Shah's Iran in 1969. It was for $80 million. Italy got a $200 million 
loan later that year. Soon up to two hundred banks joined syndi- 
cates, and the size and number of loans, and the speed at which they 
were packaged, grew dramatically. The billion-dollar loan became 
routine. Commercial banks replaced wealthy Western governments 
and development aid as the chief source of finance for the Third 
World. In 1967, commercial banks accounted for only 12 per cent of 
external public debt in the world. By the end of 1975 they passed the 
50 per cent mark at a trot. 21 

As the banks took over the international monetary system, the 
supervisory role of Washington collapsed. In 1971 the Nixon 
administration lost or abandoned control of what was happening. 22 
Two years later, in March 1973, Nixon cut the link between gold 
and dollars, and thereafter most major currencies floated, either 
singly or in groups. The float revealed the weakness of the dollar, 
which lost 40 per cent of its value against the Deutschmark 
between February and March 1973. It also increased the speed and 
hysteria of monetary movements which, thanks to electronic gadge- 
try, surged backwards and forwards across frontiers in gigantic 
masses (in the late 1970s, money transactions in New York alone 
averaged $23 billion a day 23 ). In short, by autumn 1973, the financial 
underpinning of the world economy was coming apart. To produce 
disaster, all that was required was a sudden shock. What happened 
was by no means a mere shock: it was an earthquake. 

It was no accident that the earthquake emanated from the Middle 
East. The great post-war boom had been propelled by cheap energy. 
Between 1951 and 1972, the price of fuel declined consistently 
compared to the price of manufactured goods. It fell sharply in relative 
terms 1953-69, and in the years 1963-9 it actually fell in absolute 
terms. 24 This fall in price was made possible by the rapid increase of 
exports of cheap Middle East oil. It is significant that the three leading 
sectors in the Western economic boom, motors, chemicals and 
electricity, were all energy-intensive, indeed oil-intensive. 25 By assum- 
ing energy would remain cheap, all the industrial nations were 
short-sighted. But American energy policy was a particularly sad tale 
of improvidence, since government intervention kept domestic prices 
well below world averages. From being a world exporter of energy 
America became a net importer - 7 per cent of the total by 1 960 - with 
her energy consumption increasing fast every year (5 per cent annually 
in the second half of the 1960s). Her imports of petroleum products 
were particularly disturbing: in 1960 she imported 10 per cent; by 
1968 28 per cent; by 1973 36 per cent. 26 America's own oil 
production peaked in 1970 and thereafter declined. 

The rulers of the Middle East oil states noted this growing 
dependence of the West and Japan on their oil exports, and the failure 
to devise supplementary or alternative sources of energy. Some of 
them, and especially the Shah of Iran, were impressed by the 
arguments of the ecologists that the advanced industrial nations, 
especially America, were using up natural resources too fast because 
they were underpriced. In 1972-3 there were already signs that raw 
materials and other commodities, such as farm products, were rising 
in price, and oil began to follow. The Shah sought to persuade his 
fellow-rulers that the oil-exporting countries of the Middle East 
would do better to expand production more slowly and push up 
prices: thus their oil in the ground would increase in value. But to heed 
his advice they required not only a reason but an emotion - hatred of 
Israel, and of Israel's ally America. 

Strictly speaking, there had been no paramount power in the 
Middle East since the Suez fiasco of 1956-7. But though Britain kept a 
much lower profile she was quite active and surprisingly effective in
the area for the next few years. British military interventions in 
Jordan in 1958, in Oman in 1959, in Kuwait in 1961, were 
successful in keeping the area reasonably stable. It was the progress- 
ive British military withdrawal from Aden and from the Gulf in the 
late 1960s which made the real difference. 27 Thereafter the area 
lacked an international policeman. The late Dag Hammarskjold's UN 
force was, in fact, a force working for instability, since under the UN 
doctrine of sovereignty President Nasser could ask for its withdrawal 
as soon as he felt strong enough to overwhelm Israel. That is 
precisely what he did on 16 May 1967. The UN complied three days 
later and the same evening Cairo Radio announced: 'This is our 
chance, Arabs, to deal Israel a mortal blow of annihilation.' Nasser, 
27 May: 'Our basic objective will be the destruction of Israel.' 
President Aref of Iraq, 31 May: 'Our goal is clear: to wipe Israel off 
the map.' Ahmed Shukairy, Chairman of the Palestine Liberation 
Organization, 1 June: 'The Jews of Palestine will have to leave .... 
Any of the old Jewish Palestine population who survive may stay, but 
it is my impression that none of them will survive.' 

In view of the withdrawal of the UN, these threats, and the 
concentration on her borders of armies outnumbering her own by 
three to one, heavily armed with modern Soviet material, Israel 
launched a preventive war on 4 June, beginning with strikes against 
Egyptian air-power. It lasted six days and was wholly successful. The 
Egyptian, Jordanian and Syrian forces were routed, and in Egypt's 
case humiliated. Sinai and the West Bank were occupied. The Syrian 
Golan Heights, which made possible the bombardment of the Israeli 
settlements in Upper Galilee, were stormed. Above all, Old Jeru- 
salem, including the Wailing Wall and the Holy Places, the great 
prize which had eluded Israel in 1948, was now brought into the new 
state. Thus the war corrected a painful anomaly. In its 4,000-year 
history, Jerusalem had been besieged, occupied, destroyed and 
rebuilt repeatedly, under Canaanites, Jebusites, Jews, Babylonians, 
Assyrians, Persians, Romans, Byzantines, Arabs, Crusaders, Mame- 
lukes, Ottomans and British. But it had never been divided, except 
during the years 1948—67. The reunification of the city under the 
Israelis made possible an agreed administration of the Holy Places by 
Muslims, Jews and Christians, within the framework of a national 
capital. 28 

In other respects the Israeli victory brought no permanent gains. 
Nasser survived, thanks to some adroit crowd-manipulation. 29 His 
forces were rearmed by Soviet Russia, at more than twice the 
strength of the 1967 level. The thrust of his propaganda became 
increasingly anti-American, summed up in his endlessly repeated 
slogan 'Israel is America and America is Israel.' It was one of 
Nasser's arguments that to strike at America was to hurt Israel and 
that America's growing dependence on Middle East oil was a means 
to do so. But Egypt was not an oil power. Nasser died on 28 
September 1970 of a heart-attack, a propagandist of genius, a total 
failure as a military and political leader. There was no one to replace 
him as the cynosure of Arab hopes, delusory though they might be. 
But Nasser's destructive role as an advocate and practitioner of 
violence was soon filled by Colonel Mohammed Gadafy of Libya. A 
year before, he and other young officers had overthrown the coun- 
try's pro-Western monarchy rather as Nasser had despatched 
Farouk. In many ways Gadafy modelled himself on Nasser and 
repeated his Pan-Arabist and anti-Israeli rhetoric word-for-word. 
Libya was one of the smallest Arab states with only 2 million 
inhabitants. But it was by far the largest Arab oil producer west of 
Suez, and the importance of its geographical location was stressed in 
the aftermath of the 1967 war, when the canal was closed and 
Middle East oil supplies to the West disrupted. From the earliest days 
of his dictatorship Gadafy stressed the importance of the oil weapon 
in hitting back at 'western imperialism' for its support of Israel. 

Gadafy proved extremely adroit in bargaining with the oil compa- 
nies and the consumer nations, showing that both could successfully 
be divided and blackmailed separately. When he took power Libyan 
oil was virtually the cheapest in the world. In a series of negotiations, 
in 1970, 1971 and again in 1973, he obtained the biggest oil price 
increases ever granted to an Arab power, with additional upward 
adjustments to account for the fall in the dollar. The importance of 
his success was that it was quickly imitated by the Arab-dominated 
Organization of Petroleum Exporting Countries, opec had been 
formed as a defensive body to protect the oil price when it fell. 
Hitherto it had engaged in no collective action except to agree a 
royalty formula in 1965. In 1971, following Gadafy's move, the 
opec states of the Gulf bargained together as a group against the oil 
companies for the first time. 30 At Teheran on 14 February 1971, they 
secured a 40-cents-on-the-barrel price increase. This was the 
beginning of the energy price revolution. The new agreement was to 
hold for five years, 'a solemn promise', as Henry Kissinger put it, 
'that must hold a world record in the scale and speed of its 
violation'. 31 

The likelihood that the oil weapon would now be used more 
skilfully was much increased in July 1972 when Nasser's successor, 
General Anwar Sadat, threw off the Soviet alliance, expelled his 
Soviet advisers and technicians, and aligned Egypt with Saudi Arabia 
and the other oil states of the Gulf. Sadat was not a verbalizer like 
Nasser. In spirit he was not of the Bandung generation. He was a 
realist. He recognized that the Egypt-Israel antagonism was opposed 
to Egypt's historic tradition and detrimental to her current interests, 
especially economic. He wanted to end it. But to have the power to 
make peace he first needed the prestige of military victory. On 
Saturday 6 October 1973, on the festival of Yom Kippur or Day of 
Atonement, the holiest day in the Jewish calendar, he launched a 
co-ordinated Egyptian— Syrian attack on Israel. The initial success was 
considerable. The Israeli 'Bar-Lev line' in Sinai was pierced. A large 
part of the Israeli air force was destroyed by Soviet ground-to-air 
missiles. Golda Meir, the Israeli Prime Minister, appealed in some 
panic to Washington. Some $2.2 billion of the latest American arms 
was airlifted to Israel. From 8 October the Israelis began counter- 
attacking. Before a cease-fire was signed on 24 October, Israel had 
recovered the lost territory, advanced to within range of Damascus, 
established a bridgehead on the western side of the Suez Canal, and 
surrounded a large part of the Egyptian army. 32 Egypt had demon- 
strated an unexpected military capacity, and that was enough for 
Sadat; Israel had shown she could survive initial disaster. 

The war brought out the ultimate military dependence of Israel on 
American will. It also drew attention to the damage inflicted on 
America's leadership of the West by the pursuit of the Watergate affair 
by the American media and the Congressional Democratic majority. 
When Israel counter-attacked successfully, Sadat appealed for Soviet 
support and Brezhnev sent a message to Nixon on 24 October 
warning that Soviet troops might be sent to fight the Israelis without 
further warning. Though Nixon had earlier ordered full logistical 
backing for the Israelis and now agreed to an alert of US forces 
throughout the world, the first on such a scale since the Cuban missile 
crisis of 1962, he was so cocooned in the Watergate tangle that he felt 
obliged to hand over control of the crisis to Kissinger, now the 
Secretary of State. It was Kissinger, not the President, who presided 
over the White House meeting which responded to the Brezhnev 
message; and he issued the orders for the alert. To the charge by some 
of the Watergate witch-hunters that the crisis had been engineered to 
divert attention from Nixon's difficulties, Kissinger scornfully replied 
(press conference, 25 October): 

We are attempting to conduct the foreign policy of the United States with 
regard for what we owe not just to the electorate but to future generations. 
And it is a symptom of what is happening to our country that it could even be 
suggested that the United States would alert its forces for domestic reasons. 33 

With the American President paralysed by his domestic enemies, 
there was no one to lead the West on behalf of the world's oil 
consumers when the Arab opec states responded to Israel's survival 
by employing the oil weapon with brutal violence. Already, on 16 
October, they politicized oil exports, cut oil production and (with 
non-Arab producers) raised the price 70 per cent. On 23 December 
they again raised the price, this time by 128 per cent. As a result, 
crude oil prices quadrupled in less than a year. The decision, as 
Kissinger put it, 'was one of the pivotal events in the history of this 
century'. 34 It transformed a general but gradual rise in prices into a 
price-revolution of a kind the world had never before experienced 
over so short a period. The worst hit were the poorest countries, 
most of which had acute debt-burdens and imported all their energy. 
In countries with per capita incomes around or below the $100 a 
year mark, where a billion people lived, and whose incomes had been 
rising slowly (about 2 per cent a year) in the 1960s decade, a 
downturn in growth was already occurring before the oil-price 
revolution hit them. For them it was a catastrophe. 35 They found 
themselves worse off at the end of the 1970s than they were when the 
decade opened, the first such reversal in modern times. At such low 
levels, such a direct fall in incomes meant malnutrition and related 
epidemics. The number of Africans and Asians who died in conse- 
quence of Arab oil policy in the decade after 1973 must be calculated 
in tens of millions. 

The world as a whole experienced a decline in wealth since the loss 
of output was worth twice the extra funds transferred to the 
oil-producing countries. For the industrialized countries, the result 
was a form of economic malady which Keynesianism had not 
envisaged: stagflation. From a 5.2 per cent rate of growth with 4.1 
per cent average price increases, the world moved in 1974-5 to nil or 
minus growth with 10-12 per cent average price increases a year. 
This was high inflation, and in many countries it accelerated into 
hyper-inflation. The price revolution, with the oil jump at its heart, 
spanned the years 1972-6. It was by far the most destructive 
economic event since 1945. It acted as a fierce brake on the 
energy-intensive leading sectors responsible for the prolonged expan- 
sion in the American, West European and Japanese economies, 
producing abrupt declines in output and unemployment on a scale 
unknown since the 1930s. 36 By the early 1980s, the number of 
unemployed in America and West Europe alone was 25 million. 

The disaster might have been still more serious but for the 
resiliency of the banking system. In November 1973, in the immedi- 
ate aftermath of the Middle East crisis, a big London fringe bank, the 
London and County, tottered. The Bank of England hastily launched 
a 'lifeboat', getting the major banks to provide $3 billions support 
for twenty-six other fringe banks. A bad moment occurred in the 
following June, when the German Herstatt Bank collapsed, owing 

huge sums to British and American banks, and with disturbing 
echoes of the fall of Credit Anstalt in 1931. But again the support 
system worked. At the end of 1974, the Comptroller of Currency in 
Washington was keeping under special observation some 150 US 
banks, including two of the biggest, which were known to be under 
strain. In London the property boom foundered, dragging down 
some glittering companies. The Financial Times index, 543 in March 
1972, fell to 146 at the beginning of 1975, with shares worth less, in 
real terms, than at the depths of the war in 1940. In America, New 
York city finances, long suspect, finally succumbed when the banks 
refused further loans. The richest city in the world appealed to the 
White House, but Gerald Ford refused to intervene, an event 
celebrated in a famous New York Daily News headline: 'Ford to 
City: Drop Dead'. 37 But by then the worst of the money crisis was 
over and all the banks and institutions that really mattered were still 

Indeed the commercial banks, whose Eurodollar frenzy had contri- 
buted to the instability, now used similar methods to produce some 
kind of order out of the chaos. The problem was as follows. The oil 
price revolution meant that the opec countries took an extra $80 
billion a year out of the world economy. That was 10 per cent of all 
world exports. Saudi Arabia and Kuwait alone, with tiny popula- 
tions, received an extra $37 billion a year, enough over twenty-five 
years to buy all the major companies on all the world's stock 
exchanges. There was real terror that the Arabs would use the new 
'money weapon' as they used the oil weapon. In any case it was 
essential to get the cash back into the world's productive economy 
quickly. Washington, still paralysed by Watergate, could provide no 
leadership. Happily, the extra-governmental Eurodollar system, used 
to responding to pure market needs without bureaucratic help or 
hindrance, was waiting to be used. Eurodollars were renamed 
petrodollars. A new term, 'recycling,' came into use. The petrodoll- 
ars were quickly packaged into huge loans for the hard-hit advanced 
industrial countries and for the still more disturbed developing 
countries, like Indonesia, Zaire, Brazil, Turkey and even new compe- 
titors for the Arab oil producers, like Mexico. 

The Arabs had no wish to help the Third World, except through 
government loans with strings attached. But once they put their 
money into the world banking system, they lost sight of it. And they 
had nowhere else to put it. Like Croesus, they were baffled. They did 
not like what was happening. But not as yet having a banking system 
of their own, for Koranic reasons, there was nothing they could do. 
As a Congressional witness put it: 'All they have is an iou in a bank 
account which can be frozen at any time in the United States or in 

Germany or wherever it is.' 38 If a nation has more money than it can 
spend, it has to share the use, willingly or unwillingly. America did so 
willingly, in the years after 1945, in the form of Marshall Aid, Point 
Four Aid, and in the military containment of Soviet expansion. The 
Arabs had no such altruism, but they could not stop the banks 
lending their money. Walter Wriston of Citibank put the situation 

If Exxon pays Saudi Arabia $50 million, all that happens is that we debit 
Exxon and credit Saudi Arabia. The balance-sheet of Citibank remains the 
same. And if they say they don't like American banks, they'll put it in Credit 
Suisse, all we do is charge Saudi Arabia and credit Credit Suisse: our 
balance sheet remains the same. So when people run around waiting for the 
sky to fall there isn't any way that money can leave the system. It's a closed 
circuit. 39 

It would, of course, have been a different matter if the Arabs had 
possessed a sophisticated banking network, as they belatedly real- 
ized. By the time they had begun to build up their own international 
banks, in the early 1980s, the industrial nations had tapped alterna- 
tive sources of energy, including non-Arab oil, world oil supplies 
were in surplus, and the problem of petrodollars was unlikely to 
recur, at any rate in such an intense form. The point of maximum 
Arab power had passed. That point came in the years 1974—7, when 
the Arabs had half the world's liquidity." From: Paul Johnson „Modern Times” 
REVISED EDITION HarperCollmsPublishers