The Eurocurrency market is arguably the most dramatic financial innovation in the post-war period yet very little is known about its origins. This paper examines two facets of the Eurodollar market: why it happened and why London kept most of the business. Using archival evidence, this article reveals that Eurodollars were accumulated earlier than has hitherto been thought. This has important implications for how we interpret the factors prompting the innovation. High interest rates, self-regulation by banks, and changes in access to the forward exchange market combined in mid-1955 to encourage innovation by the Midland Bank. The major source of competitive advantage for London was the regulatory environment which combined tight money in the domestic economy with relative freedom in international finance. © 1998 Academic Press.
