<p>They actually literary are a deposit accounts of US dollars outside US. Also no those foreign banks will not generally have accounts at Fed. In fact one of the reasons why eurodollar deposits pay higher interest than a dollar deposit in US as they are more risky since they are neither subject to FDIC insurance and those banks will not get liquidity from Fed if there is run on them.</p>
<blockquote>
<p>After all, to a commercial bank, electronic deposits are just a local accounting fiction, the movement of which gets accounted for at the end of the day by a net transfer of central bank reserves.</p>
</blockquote>
<p>But there is no 1:1 correspondence between amount of dollars in circulation and Fed reserves. You can have a look at Fred data <a href="https://fred.stlouisfed.org/series/EFFRVOL" rel="nofollow noreferrer">for volume of reserves</a> and <a href="https://fred.stlouisfed.org/series/M2" rel="nofollow noreferrer">money stock <span class="math-container">$M2$</span></a> and you can see that at any point in time money stock is several orders of magnitude larger than volume of reserves.</p>
<p>If you want to know how eurodollars work on conceptual level then have a look at <a href="https://www.jstor.org/stable/1991917?seq=1#metadata_info_tab_contents" rel="nofollow noreferrer">Niehans, &amp; Hewson (1976)</a>.</p>
<p>Actually a good primer was also provided by <a href="https://files.stlouisfed.org/files/htdocs/publications/review/71/07/Principles_Jul1971.pdf" rel="nofollow noreferrer">Milton Friedman (1971)</a>. Friedman, also includes concrete example.</p>

CC BY-SA 4.0
2020-10-03T18:57:43.630Z
Thank you for your help.  Then please help me try to understand something:  if i were to transfer my dollars in a euro dollar account at a British bank to an American bank, what in the most concrete sense actually happens?  If it were american bank to american bank, it would manifest in an end-of-day transfer of central bank reserves at the fed.  but since the british bank has no account at the fed, how is that literally transacted?
Mr. Cooperman
CC BY-SA 4.0
2020-10-03T19:02:30.717Z
(also I do understand that electronic bank credit is many times greater in quantity than central bank reserves. that, at least, is not one of the many sources of my confusion)
Mr. Cooperman
CC BY-SA 4.0
2020-10-03T19:03:31.403Z
@Timkinsella I added a reference to  Milton Friedman (1971), can you have look at his paper? the paper is very short and it literary has example with all accounting that goes on. I think Friedman explains it belter than I ever could him being famous for his writing.
1muflon1
CC BY-SA 4.0
2020-10-03T19:04:42.267Z
I will! thank you again for your help
Mr. Cooperman
CC BY-SA 4.0
2020-10-03T19:05:33.670Z
@Timkinsella you are welcome. you can also go directly to section "hypothetical example" if you only want to see the example itself.
1muflon1
CC BY-SA 4.0
2020-10-03T19:22:50.590Z
ok so from this example, it seems that transacting in eurodollars requires foreign banks to have accounts at american commercial banks.  In  this example the actual transfer could only take place because the Sheik and the British Bank H *both* had accounts at the american bank, Morgan Trust.  Is that correct?
Mr. Cooperman
CC BY-SA 4.0
2020-10-03T19:39:33.083Z
@Timkinsella  that is the most common example but strictly speaking its not necessary for them both to actually have an account at that US bank - that was there in order so the author can make exposition using that accounting and to also explain how that ultimately does not affect balance of trade.  Those deposits could in principle be also created by just literary physically bringing cash from US over to EU but the example shown by Friedman would be more representative of how normally they are created
1muflon1
CC BY-SA 4.0
2020-10-03T19:42:28.303Z
ok, cool, as long as it's in some sense "backed" by literal cash, or deposits at an american bank then i'm starting to get a foothold!
Mr. Cooperman
CC BY-SA 4.0
2020-10-03T19:44:14.937Z
@Timkinsella yes. Also that first paper cited has more detail with various models if you want to dig deeper
1muflon1
CC BY-SA 4.0
2020-10-03T18:44:38.103Z
2020-10-03T19:01:46.300Z
2020-10-03T19:01:46.300Z
1muflon1
<p>There are readily available &quot;definitions&quot; including on this site, but I want to know what they are in a concrete sense.  Because the definitions make them basically sound like just electronic bank deposits in dollars at a foreign commercial bank, but in a literal sense this seems nonsensical unless those foreign banks (or the central bank in their country) have accounts at the US Fed. After all, to a commercial bank, electronic deposits are just a local accounting fiction, the movement of which gets accounted for at the end of the day by a net transfer of central bank reserves. So are they US treasury securities? or physical cash? or do foreign banks indeed have accounts at the fed?</p>

<eurodollar>
What, in the most literal sense, are eurodollars?
Mr. Cooperman
# What, in the most literal sense, are eurodollars?

(Asked by: username_0 on 2020-10-03)

There are readily available "definitions" including on this site, but I want to know what they are in a concrete sense. Because the definitions make them basically sound like just electronic bank deposits in dollars at a foreign commercial bank, but in a literal sense this seems nonsensical unless those foreign banks (or the central bank in their country) have accounts at the US Fed. After all, to a commercial bank, electronic deposits are just a local accounting fiction, the movement of which gets accounted for at the end of the day by a net transfer of central bank reserves. So are they US treasury securities? or physical cash? or do foreign banks indeed have accounts at the fed?

**Tags:** eurodollar


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## 1 answers

### Answer by username_1 on 2020-10-03. Score: 2 | Accepted answer

They actually literary are a deposit accounts of US dollars outside US. Also no those foreign banks will not generally have accounts at Fed. In fact one of the reasons why eurodollar deposits pay higher interest than a dollar deposit in US as they are more risky since they are neither subject to FDIC insurance and those banks will not get liquidity from Fed if there is run on them.

> After all, to a commercial bank, electronic deposits are just a local accounting fiction, the movement of which gets accounted for at the end of the day by a net transfer of central bank reserves.

But there is no 1:1 correspondence between amount of dollars in circulation and Fed reserves. You can have a look at Fred data [for volume of reserves](https://fred.stlouisfed.org/series/EFFRVOL) and [money stock $M2$](https://fred.stlouisfed.org/series/M2) and you can see that at any point in time money stock is several orders of magnitude larger than volume of reserves.

If you want to know how eurodollars work on conceptual level then have a look at [Niehans, & Hewson (1976)](https://www.jstor.org/stable/1991917?seq=1#metadata_info_tab_contents).

Actually a good primer was also provided by [Milton Friedman (1971)](https://files.stlouisfed.org/files/htdocs/publications/review/71/07/Principles_Jul1971.pdf). Friedman, also includes concrete example.

> **Comments:**
> **username_0**: Thank you for your help.  Then please help me try to understand something:  if i were to transfer my dollars in a euro dollar account at a British bank to an American bank, what in the most concrete sense actually happens?  If it were american bank to american bank, it would manifest in an end-of-day transfer of central bank reserves at the fed.  but since the british bank has no account at the fed, how is that literally transacted?  
> **username_0**: (also I do understand that electronic bank credit is many times greater in quantity than central bank reserves. that, at least, is not one of the many sources of my confusion)  
> **username_1**: @Timkinsella I added a reference to  Milton Friedman (1971), can you have look at his paper? the paper is very short and it literary has example with all accounting that goes on. I think Friedman explains it belter than I ever could him being famous for his writing.  
> **username_0**: I will! thank you again for your help  
> **username_1**: @Timkinsella you are welcome. you can also go directly to section "hypothetical example" if you only want to see the example itself.  
> **username_0**: ok so from this example, it seems that transacting in eurodollars requires foreign banks to have accounts at american commercial banks.  In  this example the actual transfer could only take place because the Sheik and the British Bank H *both* had accounts at the american bank, Morgan Trust.  Is that correct?  
> **username_1**: @Timkinsella  that is the most common example but strictly speaking its not necessary for them both to actually have an account at that US bank - that was there in order so the author can make exposition using that accounting and to also explain how that ultimately does not affect balance of trade.  Those deposits could in principle be also created by just literary physically bringing cash from US over to EU but the example shown by Friedman would be more representative of how normally they are created  
> **username_0**: ok, cool, as long as it's in some sense "backed" by literal cash, or deposits at an american bank then i'm starting to get a foothold!  
> **username_1**: @Timkinsella yes. Also that first paper cited has more detail with various models if you want to dig deeper  

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