<< Read More: We Know How This Ends (Part 1) 

In March 1969, while Buba was busy in the quicksand of its swaps and forward dollar interventions, Netherlands Bank (the Dutch central bank) had instructed commercial banks in Holland to pull back funds from the eurodollar market in order to bring up their liquidity positions which had dwindled dangerously during this increasing currency chaos.At the start of April that year, the Swiss National Bank (Swiss central bank) was suddenly refusing its own banks dollar swaps in order that they would have to unwind foreign funds positions in the eurodollar market.  The Bank of Italy (the Italian central bank) had ordered some Italian banks to repatriate $800 million by the end of the second quarter of 1969.It also raised the premium on forward lire at which it offered dollar swaps to 4% from 2%, discouraging Italian banks from engaging in covered eurodollar placements.

The “rising dollar” of 1969 had somehow become anathema to global banking liquidity even in local terms.

The FOMC, which had perhaps the best vantage point with which to view the unfolding events, documented the whole affair though stubbornly and maddeningly refusing to understand it all in greater context of radical paradigm banking and money alterations.In other words, the FOMC meeting MOD’s for 1968 and 1969 give you an almost exact window into what was occurring as it occurred, but then, during the discussions that followed, degenerating into confusion and mystification as these economists struggled to only frame everything in their own traditional monetary understanding – a religious-like tendency that we can also appreciate very well at this moment.

At the April 1969 FOMC meeting, Charles A. Coombs, Special Manager of the System Open Market Account, reported that the bank liquidity issue then seemingly focused on Germany was indeed replicated in far more countries.

Mr. Coombs reported that the other main recent development in the European exchange markets had been the actions taken by the various continental central banks to defend their domestic liquidity and credit situations from the strains generated by the sharp rise in U.S. bank borrowings from the Euro-dollar market.

European central banks, in particular, were nearly apoplectic about US banks’ sudden and incessant presence as eurodollar borrowers. Prior to 1968, eurodollars were largely a European affair, that Merchant’s bankers market to achieve global trade finance and settlement.Rising consumer inflation starting in 1965 had the effect in domestic money markets of increasing interest rates then under the control of Regulation Q.Ostensibly a systemic protection arrangement put in place in the 1930’s to avoid another Great Depression, Regulation Q limited what banks could pay on deposits.By the middle of 1968, nearly all money market rates had hit their ceilings; eurodollar markets had no ceilings.

Large time deposits particularly of corporate, non-bank accounts started shifting in 1968 and playing a large role in provoking and amplifying the global currency crisis that year.Large banks in New York responded to the loss of primarily CD’s by simply bidding for funds in eurodollars (or exchanging them by bookkeeping alone, as Milton Friedman pointed out contemporarily) and booking those liabilities instead as borrowings from their foreign subsidiaries operating in eurodollar markets. The scale here was also massive; foreign subs booking eurodollar liabilities on behalf of their domestic head offices had added $3 billion during January and February 1969 alone.

The more US banks were “forced” to bid in eurodollars to escape the liability and deposit strangle of Regulation Q, the more illiquidity spread throughout the rest of the exchange markets, particularly eurodollars and eurocurrency.As the FOMC discussion in April 1969 pointed out then, “U.S. banks were willing to pay almost any rate for marginal additions to their resources, but that the actions of U.S. banks at their margins were tending to force upward the general levels of rates in European money markets.”There was a direct link between eurodollars and the domestic money conditions in the countries most exposed or participatory in eurodollars.