Walter Wriston was once one of the most powerful people on the planet. The chairman of the financial giant Citibank and its parent corporation, Citicorp, he was also a man with a vision. Wriston was a globalist who was deeply influenced by economist Friedrich Hayek’s vision of a world in which market freedoms were the basis of individual liberty. Look closely at the burgeoning of international finance, of information networks, of logistical innovations that transformed trade. You’ll find Wriston everywhere.
Wriston’s financial innovations helped create the modern Eurodollar market — a vast offshore realm of financial transactions in US dollars happening outside of US borders. His efforts to build a private global payments system under Citibank’s control in the early 1970s prompted other banks to build their own collective system, so as to avoid being drawn inside Citibank’s gently smiling jaws.
Wriston’s willingness to put his ideas into action changed the world. As he explained in 1979, the “current banking network, with its Euromarkets and its automated payments system” seemed dull and technical, but it had immense political consequences. He believed that if money could move rapidly from country to country, it could no longer be mastered by nations. Instead it might master them, replacing the whimsical tyranny of political rulers with the austere rigor of market discipline.
But the tragedy of globalization was that men and women like Wriston built a world that seemed to escape the control of government but in fact was wide open to government power and its own undoing.
A clattering steampunk engine
At the beginning of Wriston’s career, in the 1960s, international banking barely existed. It was sluggish, timid, and lazy. Banks were trapped inside national borders by complex and clashing rules put in place after the financial crash of the Great Depression. These regulations meant that most banks faced little international competition and had scant incentive to invest in new ways of doing things. It was nearly impossible to be a true international bank.
The 1960s banking industry was a Victorian relic in the modern era, a clattering steampunk engine of rusting pistons and gutta-percha-covered cables, with a few incongruously modern parts bolted on. Eric Sepkes, who helped build the European payments system, later recalled how Citibank’s London operation relied on a system of pneumatic tubes to communicate between the office that initiated the payments to clients — borrowers, business, brokers — and the office that authorized those payments. Staff had to handwrite payment instructions on a form, which they then stuffed into a canister and inserted into a partial vacuum conduit that ferried it to its destination where the authorizes would then release the funds (the City of London had built miles of pneumatic tube networks in the nineteenth century). One day, when the payments people didn’t hear back from authorization, they discovered that the tube had become blocked. Citibank had to call in a chimney sweep to fix the problem, re-enabling payments processing for the entire continent of Europe.
With proper technology, the dull-seeming backroom activities of banking such as payments processing could become a source of profit and power.
Global banking was a system of mysterious tubes on a much larger scale, with various portals that took money in, did expensive and incomprehensible things to it, and spat it out somewhere else. No one fully understood the machinery, least of all the people who were supposedly in charge. The gentlemanly activities of merchant banking, where men with excellent pedigrees built on their social connections to win deals, remained rigidly distinct from the mundane tasks of payments processing, which were performed by female clerks surrounded by vast piles of paper. It took a very long time to send money across borders. At one point, inflation in Argentina was rising so rapidly that Citibank’s branch in the country had to convert its profits into cases of Scotch whisky to prevent the value of the income from being inflated away before they could be sent to New York.
Wriston helped rebuild this clanking machine into an engine of transformation, welding disjointed national markets into a true world economy. His strategy was built around two insights. The first was that global markets could — if they were allowed — circumvent the labyrinthine systems of rules constructed by national regulators and eventually replace them. The second was that banking was a “branch of the information business.”
Market prices provided one crucial source of information, summarizing as they did the decisions of millions of individuals over what to buy and sell. Technology provided another, allowing banks to discover the information they had buried within their own bureaucracies and to better exchange information with each other and their customers. With proper technology, the dull-seeming backroom activities of banking such as payments processing could become a source of profit and power.
The rise of the US dollar
When Wriston began to remake Citibank, money had already begun to seep through the seams in the ductwork. Businesses outside the United States desperately wanted US dollars, which were needed, for example, to buy and sell oil, while businesses in the United States wanted to earn higher returns. US regulators had capped interest rates for ordinary consumers and stopped interest payments altogether on corporate deposits, limiting the profits many stateside banks could earn. Bankers had already begun to figure out crafty means to connect overseas dollar demand to American supply.
Wriston and his colleagues built the institutional infrastructures that allowed this to happen at scale. They created financial instruments like the certificate of deposit, which provided a legal pipeline to smoothly convey the dollars owned by American businesses to the international banks that needed them for their customers. Citibank’s competitors, like JPMorgan and Warburg, adapted these instruments and came up with their own ideas. What was once a small and disconnected trade in Eurodollars, based primarily in London, became a vast marketplace for buying, selling, and lending in dollars outside the United States.
As the political economist Eric Helleiner describes it, the Eurodollar market became a legal gray zone where vast amounts of US dollars circulated beyond US borders. As the market grew, the US dollar became established as the universal basis of international trade. If you were a Japanese company selling goods to a business in Italy, it was hard to convert the Italian lira that you were paid in directly into Japanese yen. The economic relationship between Japan and Italy wasn’t big enough to support a liquid market where the two currencies could be exchanged directly. The Eurodollar market provided an easy detour, where you could turn lira into dollars and then dollars into yen. And as the supply of Eurodollars grew, it increasingly made sense for companies to simply buy and sell in dollars, which they could then convert into their home currencies.
The dollar became a global currency, without anyone really planning it.
The result was that the dollar became a global currency, without anyone really planning it. More dollars circulated outside the United States than within it. US officials at the Federal Reserve and elsewhere paid surprisingly little official attention to what was happening. This made the market attractive, for example, to the Soviet Union, which needed dollars for international trade but worried that they might be seized by the US government if they were deposited directly in American banks. By using Eurodollars, which were bought and sold in London and Italy, they thought they could avoid this risk.
These markets all depended on an infrastructure of clever financial engineering. Banks weren’t trading physical stacks of hundred-dollar bills. Looked at closely, Eurodollars were an accounting fiction, imaginary dollars traded between real banks. They couldn’t be used for anything other than buying other currencies. But every single Eurodollar had to be backed by a real dollar, sitting in a US bank operating under US law and responsible to US regulators. As Wriston explained, “All the dollars in the world — except [physical] currency — are deposits in a bank in America, because that is the only place anyone can spend a dollar.”
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This meant that transactions using Eurodollars had to be cleared through a US bank’s internal processes (moving money from one customer’s account to another’s) or through a clearing institution run by US banks, such as CHIPS, the Clearing House Interbank Payments System. Foreign banks had to maintain clearing accounts in US financial institutions if they were to trade dollars and participate in global finance. The Eurodollar market might indeed have been a pirate kingdom, but it was one where the buccaneers had to regularly provision themselves in the monarch’s ports. The more that foreign banks came to depend on access to US dollars, the more vulnerable they were to US regulators, whenever those regulators finally woke up.
Gradually, the “dollar clearing system” run by US banks like Citibank and JPMorgan and clearing institutions like CHIPS became the beating heart of the world’s financial system, circulating dollars around the world in a regular systole and diastole. The Eurodollar market, far from creating a decentered new realm of finance, had made the global financial system more fragile and more vulnerable to American jurisdiction.
State-controlled financial system
Wriston had hoped to build a world where business, not government, was in charge. He and his peers helped markets spill over the confines of national borders into each other, a confluence that grew into a world ocean of information, money, and production. But even if business leaders like Wriston did not aspire to become sovereigns, they wanted to build their own business empires.
In 1998, Helleiner wrote a skeptical riposte to Wriston’s vision. It wasn’t just that Eurodollar markets existed on the sufferance of governments and would have withered if the United States had not let them flourish. It was that global finance was “increasingly concentrated” in great financial centers like New York and London where electronic money had to pass through various “central ‘choke points.'”
As Helleiner speculated, this might actually increase the power of governments like the United States rather than undermining it. The question was when these governments would take up their power, and what they would do when they did.
Within a couple of weeks of the September 11 attack, Helleiner’s predictions began to become a reality. The US Department of the Treasury started to aggressively investigate its options for gathering financial data from the world, so that it could detect future attacks. One of the key areas to watch, the Treasury found, was the flow of dollars around the world. It began to develop a new kind of sanction, which used its control of “dollar clearing” to force international banks to implement US policy outside its borders. The SWIFT (Society for Worldwide Interbank Financial Telecommunication) messaging system — which plays a core role in global financial transfers — and dollar clearing were combined to cut Iran out of the world’s financial system, forcing it to the negotiating table to discuss its nuclear weapons program.
The US officials who planned these steps often thought of them as once-off emergency measures. But in the years to come, the US government would repeatedly exercise its power over the dollar to exact a financial toll on its geopolitical adversaries — including, most recently, its sanctions on Russia following the invasion of Ukraine. Instead of the stateless, government-less world that Wriston envisioned, the internationalization of the US dollar became the precedent for a massive transformation of America’s financial power.
Henry Farrell is the SNF Agora Professor at Johns Hopkins SAIS, the 2019 winner of the Friedrich Schiedel Prize for Politics and Technology, Editor-in-Chief of The Monkey Cage at The Washington Post, and co-founder of the popular academic blog, Crooked Timber.
Abraham Newman is a professor at the School of Foreign Service and Government Department at Georgetown University.
Excerpted from UNDERGROUND EMPIRE: How America Weaponized the World Economy by Henry Farrell and Abraham Newman. Published by Henry Holt and Company. Copyright © 2023 by Henry Farrell and Abraham Newman. All rights reserved.
