Unit 5: The Eurodollar System
This unit attempts to explain the complexity of today's monetary system. It begins with an overview of the Eurodollar, covers the financial crisis of 2007–2009, and details the onshore dollar and offshore dollar monetary hierarchies. It details the change in gold as the world's monetary first layer and the transition to an onshore/offshore dollar world. It discusses the last several decades of monetary instruments, including Treasury repo and money market funds (MMFs). The financial crisis of 2007–2009 is covered in detail, which led to a shift in the dollar system. The liquidity crises of 2019 and 2020 are also discussed.
Completing this unit should take you approximately 2 hours.
Upon successful completion of this unit, you will be able to:
- describe the Bretton Woods agreement of 1944, its ramifications, and its ultimate collapse;
- explain the origins of the eurodollar (offshore dollar) system;
- illustrate how Money Market Funds (MMFs) work within the monetary hierarchy;
- describe the financial crisis in the money market in 2007-2009, and explain the Federal Reserve's FX swap lines;
- define Quantitative Easing (QE) and other Federal Reserve asset purchase programs; and
- describe the liquidity crises of 2019 and 2020 and the Federal Reserve's response.
5.1: Offshore Dollars
This subunit begins with the significance of the Bretton Woods agreement and how the dollar became the undisputed world reserve currency. It explains the origins of the Eurodollar system. The transition to the dollar as the world reserve currency carried implications throughout the world and was a product of monetary evolution. The Eurodollar's creation during the 1950s has implications important to understanding today's monetary system. It discusses Triffin's Paradox and how the dollar was unlinked from gold in the 1970s. This subunit highlights the beginning of free-floating currencies without the restriction of gold as first-layer money.
Read this section about the Bretton Woods agreement of 1944 and the orgins of the Eurodollar system.
5.2: Money Market Funds
This subunit introduces modern money markets, dealer banks, and Treasury repo through a layered money framework. It explains the importance of reference rates, which ties together the Eurodollar and the onshore US dollar systems. It also covers money market funds (MMFs).
Read this section about modern money markets and note the claims it uses to detail the inner workings of the dollar money market.
5.3: Financial Crises
This subunit examines the past two decades of the dollar-denominated monetary system. From the Long Term Capital Management crisis in 1998 to the 2007–2009 financial crisis to the pandemic's liquidity crisis, the dollar system has faced challenges. It examines the Federal Reserve's responses to each crisis and discusses its position in today's monetary hierarchy. It also discusses the nature of today's financial and monetary system.
This passage discusses the past two decades of the dollar-denominated monetary system. Take note of the Federal Reserve's responses to each crisis.
5.4 Supplemental Information
Watch this video on Breaking Down Eurodollars, the world's most essential and least understood market.
Unit 5 Review and Assessment
This video walks through the major topics we covered in Unit 5. As you watch, consider the implications of the Eurodollar system.
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.