The Eurodollar Market, Short-term Capital Flows and Currency Crises

Central bankers have had an unusually hard time these last five or six years. Added to their problem of having to contend with severe inflation they have had to cope with the disruptive effects of vast flows of short-term capital. These capital flows have undermined the effectiveness of national monetary policies and have precipitated currency crises. The effects have been particularly felt in Europe, but even the United States did not remain unscathed during the international monetary whirlwind of 1971 and 1973. Speculative flights out of U.S. dollars forced two devaluations on the United States during these years, wrecking the Bretton Woods fixed exchange rate system in the process. During these crises of the early 1970s the Eurodollar market was often blamed for contributing to, if not actually being the cause of, this state of affairs. There were frequent calls for international action to control this largely unregulated private market in short-term monetary assets.