The Eurodollar System and Offshore Dollar Creation

A company in Singapore sells goods to a buyer in the US and gets paid in dollars. It doesn't repatriate the money into the US banking system — it deposits it at a bank in Singapore or London, in dollars. That bank now holds a dollar liability, and it can lend those dollars out again, to another company, another bank, anywhere in the world, entirely outside the United States. This dollar, sitting in an account outside the US and circulating through offshore banks, is a eurodollar — the name has nothing to do with the euro currency, which did not exist when the term was coined.

Why this system exists and keeps growing

Once the dollar became the currency most of the world uses to invoice trade and denominate debt, demand for dollar funding outside the US grew far beyond what any single US bank branch network was built to serve. Offshore banks stepped in: they take dollar deposits from anyone, anywhere, and lend dollars back out, all without ever touching a US-domiciled account. Because these banks sit outside direct Federal Reserve reserve requirements, they can, in principle, extend more dollar credit per dollar of deposits than a domestic US bank could under the same deposit base — the same lending-and-relending chain that creates money domestically, just running offshore and with a different regulatory ceiling.

Worked example

Bank A in London takes a $100 million eurodollar deposit from a corporate client. It lends $95 million of it to Bank B in Singapore (keeping $5 million as a liquidity buffer, since there's no formal reserve requirement forcing a specific ratio offshore). Bank B relends $90 million of what it receives to a corporate borrower, keeping the rest as its own buffer.

1. First link. $100 million deposit → $95 million relent, extending $95 million of new dollar credit.
2. Second link. $95 million received → $90 million relent, extending another $90 million of credit.
3. Running total of credit created off the original $100 million. $95 + 90 = 185$, or $185 million in loans outstanding, against an original $100 million deposit that never touched a US bank account.

Each additional link in the chain keeps extending dollar-denominated credit, bounded only by each bank's own risk appetite and buffer choice — not by a Federal Reserve reserve requirement, because none of these banks are US-domiciled.

What this means in practice

The eurodollar system means the effective global supply of dollar credit is larger, and less directly controllable by the Federal Reserve, than domestic measures of the US money supply would suggest. It is also why dollar funding stress can originate entirely offshore — a shortage of dollars among European or Asian banks, unrelated to anything happening inside the US economy — and why the Fed's swap lines exist: they are a tool built specifically to backstop this offshore dollar system when it seizes up, because the Fed has no other direct lever over banks it doesn't regulate.