Machlup treats the Euro-dollar boom as a conceptual mystery before it is an empirical one. His central point is deliberately cautious: Euro-banks may have created dollar money, but the available evidence cannot show how much, because discussion repeatedly confuses deposits, loans, reserves, credit, and money.
some such conclusions cannot be obtained on the basis of the empirical evidence available at present
The essay therefore begins by policing categories, above all the distinction between
flows per period and stocks at a moment of time.
This distinction shapes Machlup’s criticism of loose references to loans, credit, deposits, and even the Euro-dollar market. A market exists when new lending is negotiated, but reported market size usually means a stock of outstanding liabilities. The terminology matters because it can obscure the banking-system features at issue: reserve positions, interbank redepositing, multiple balance-sheet claims, and possible money creation.
Words guide the attention of the audience; the use of the word "market" may divert attention from the important nonmarket aspects of the Euro-dollar system.
Machlup’s main monetary move is to distinguish legal form from economic function. Legally, a Euro-dollar depositor is a creditor of a bank; economically, a nonbank holder of a liquid dollar deposit may possess dollar spending power. Such balances may therefore be money or near-money rather than merely loans supplied to banks. Interbank claims, by contrast, cannot be counted in the same way, since chains of placements among banks can inflate gross Euro-dollar totals without increasing the public’s liquid balances.
This distinction also clarifies the disputed idea of redepositing. In ordinary banking theory, redepositing helps explain multiple deposit expansion when loan proceeds remain inside the banking system. In Euro-dollar discussion, however, the term often refers to international interbank relending rather than to the creation of new nonbank deposits. Gross balances may thus grow through London-Zurich-Milan chains that look large on balance sheets but do not necessarily represent new dollar money.
Machlup’s preferred analogy is not simply the Federal Funds market but U.S. nonmember banking. Euro-banks hold dollar claims on American banks as reserves and can build dollar liabilities on top of them. The crucial question is whether those liabilities are transferred primary deposits or derivative deposits generated by Euro-bank lending whose proceeds remain in the system. A low reserve ratio may show possible expansion capacity, but it does not prove actual creation.
A statistical “reserve multiplier” is no evidence for a positive credit multiplier.
The historical discussion explains why Euro-dollar balances became attractive without reducing the boom to one cause. Depositors wanted interest, convenience, lower conversion costs, and usable international liquidity. Banks wanted freedom from Regulation Q, reserve requirements, and domestic constraints. Central-bank swaps, exchange controls, and the dollar’s transaction role all reinforced growth. Yet these motives do not show whether expansion came from primary transfers into Euro-banks or from endogenous Euro-bank credit creation.
Machlup’s balance-sheet method is therefore a disciplined tracing of changes of partners. If dollars leave U.S. deposits, enter European banks, and return as loans to American banks, the main result may be a recomposition of liabilities rather than new money. Likewise, when official dollar claims become commercial-bank claims, the identity of holders changes, but the monetary effect depends on whether nonbank liquid balances are created. The round trip must be slowed down transaction by transaction.
The final propositions list many possible sources of Euro-dollar deposits: export proceeds, securities sales, withdrawals from American banks, conversions from other currencies, outside inflows, and Euro-bank loans whose proceeds remain within the system. But American borrowing in Europe does not automatically enlarge nonbank Euro-dollar deposits, and Euro-dollar growth alone does not prove credit creation. Machlup’s enduring contribution is this disciplined indeterminacy: offshore dollar money is real and regulation-sensitive, but intelligible only when credit as flow is kept distinct from money as stock.
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