Eurodollar creation: comments on Prof. Machlup’s propositions and developments

Abstract

Fritz Machlup recently reproposed the issue of the logical foundation underlying the flows of funds denominated in dollars and other “strong” currencies which are traded in the so-called Euro-dollar market. The present paper shows that Machlup’s study picks out only some of the aspects of a more general theory presented elsewhere and underestimates the possibilities to empirical research opened up by the present statistical endowment. The central thrust of the analysis is the incorporation of the demand for and the supply of international liquidity within a unified framework. The authors first discuss the relationship between the U.S. balance of payments and the Eurodollar market. An interpretation of the empirical content to assign to the reserve position of Eurobanks is then suggested. Finally, the authors postpone to an appendix the discussion of Machlup’s six propositions in terms of a more general framework of international financial flows.

JEL: E44, F32