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- [00:01]
A
Welcome to the New Books Network.
- [00:05]
B
I'm Caleb Zakrin and you're listening to the Truth About Bullshit on the New Books Network. Taking inspiration from Harry Frankfurt's seminal work on bullshit, we take on big ideas with brilliant scholars who seek to dispel myths, clarify confusions and cut through conflicting perspectives with clarity of thought. A topic I've been wanting to take on for a while now is the US dollar, the world's global reserve currency. As history shows, currencies tend to follow a life cycle with a rise and decline. Examining the history of major reserve currencies tells us what threats are faced by the dollar and what we might expect from a likely future decline of the world's current dominant currency. Barry Eichengreen's Money Beyond Borders takes readers on 2,500 year journey from the first metallic coins to our current fiat dollar. While it might seem like an exorbitant privilege to possess the world's global reserve currency, the cost associated can include the need to invest heavily in defense capabilities over financialization and underinvestment in industry. As one of the world's leading economic historians, Barry spent the majority of his life thinking about the costs and consequences of money. While reading his book, I found myself fiercely underlining insights that seemed to dispel some myth I'd imbibed about money. I'm thrilled to have Barry Eichengreen on the Truth About Bullshit to discuss bullshit and money. Barry, thanks for joining me today.
- [01:21]
A
Good to be here, Caleb. I didn't know that underlining could be fierce.
- [01:25]
B
Oh, it's very fierce when reading a book like this. And I have to say this is not the first book I've read of yours and I've always found that you have the ability to bring in so many different ideas under your books are they're jam packed, but they're not exactly super long. And I think part of it is you're really good at just displaying clarity of thought. This book, I feel like you can kind of jump in anywhere looking for whatever ideas you want. You can pick up in the middle of seemingly in the middle of a chapter and find very interesting ideas. And I think that the way that you kind of walk through the history of currency is quite clear. I've read other books that take on histories of currencies and oftentimes I feel like they tend to get bogged down. So I really do think that if anyone's looking for a book that is a good entry point, this is a great one. And before jumping into the book, I Was wondering if could just introduce yourself a little bit. Obviously you've had quite a long, illustrious career. So how did you become an economic historian to begin with?
- [02:23]
A
I was always interested in becoming a historian, but I found history to be complicated, woolly, if you will. I needed some kind of organizing framework to understand the history and economics. Economic theory provided that kind of organization. So I became a hybrid economist slash historian. Thinking, trying to think like historians think, but using some of the organizing frameworks from economics.
- [02:57]
B
Yeah, I feel oftentimes like there's a bit of a split. Some economists seem to really shun history completely, like they prefer models. But I really do think that historical approaches is very valuable because I think that a lot of people tend to think in terms of history and they will refer back to the ways things were in different moments, different periods. And it can be extremely valuable for actually thinking through our present day problems. And there are plenty of them. You begin the book by looking at really the origins of metallic money. Obviously, as you point out, there have been other forms of money used in the past, everything from shells to lumps of metals, to literally just people bartering knives and axes. But could you talk a little about the very origin of metallic money, how that started, what that first looked like?
- [03:49]
A
The first coins trace back to ancient Lydia, present day Anatolia, if you will, Turkey, western part of Turkey, where the Lydian king Croesus was really the mover, so far as we can tell, behind the transition from ingots, in other words, lumps of precious metal, to coins, discs of precious metal with an image imprinted on them that provided a certain level of standardization that meant using this standard, using this form of money became convenient and increasingly prevalent. So the Lydians did business with various Greek islands off the coast of what we now call Turkey. And the practice of using coin money spread from Lydia to ancient Greece, Famously the owls of Athens, so called because of the image of the owl imprinted on them of Alexander the Great and other Greek figures that circulated throughout the Mediterranean, back into the Middle east and Asia for several centuries. That is the opening chapters of the book, if you will, which then give way to Roman coinage, the coins of Byzantium, the Byzantine Empire, which circulated in Europe and over much of asia for like 700 years. That then bring us up to the Middle Ages, early modern period and today.
- [05:52]
B
And one of the themes of this book, obviously the title is Money beyond Borders. You're looking at coins in this period that were used beyond the borders, the boundaries of the place that they were being minted. And there Are some, you know, depending on the, the coins and depending on the region, there's dispute about why you might find coins from Athens or coins from Macedonia in a certain region. Whether that's, you know, they traveled there because of war making or because there was actual trade involved. So what are some of the debates that people have had about whether or not there really was, you know, considerable amount of trade that we could actually say that there were reserve currency at this time or whether or not these coins were just appearing in far flowing places because of the spread of war.
- [06:38]
A
Before getting to the question I want to flag, Caleb, what, what you said by way of introducing it, that there are plenty of histories of money, too many histories of money. And one way I try to maintain focus and coherence is by focusing in particular on the cross border use of currencies, what today we call global currencies or what today we call the global dollar. So I'm interested in how currencies were used across space even in the early modern and ancient periods. If we go back to ancient Greece and Rome, we have to rely on archaeological evidence, we have to rely on numismatics, in other words, where hoards of coin are found because of the complete absence or dearth of written records. So when we find such a hoard, when Roman coins are found in a medieval castle in Japan, we kind of have to speculate about how they ended up there. Did they end up there as a result of trade between Europe and Japan? In that case, it seems like the answer is probably no, because the castle was built much later, a millennium later, following the demise of the Roman Empire. And we can infer that maybe the coins ended up there as a result of some kind of military action or something else many years later. Similarly, when Greek or Roman coin is found north of Greece and Italy in what we would call in present day Germany, there are debates about whether these were side payments to buy off otherwise hostile tribes, barbarians in the terminology of the day, or whether they ended up there as a result of commerce of normal commercial transactions between issuing state and the foreign tribe or power. So often we don't know for sure. In some cases the timing gives away the fact that there was commerce involved. That the archaeological evidence can help us date hoards of Roman coin that show up in China that coincide with the appearance in Europe of Chinese ceramics or silks or whatever. In other cases we can only guess, right?
- [09:42]
B
Yeah, the historians working on these sorts of problems, I find it such challenging work and no wonder people are still debating it. And obviously what's quite interesting is while the images stamped on the coins are changing, obviously the materials tend to be similar. It's silver, gold or the composite electrum. And you talk a little bit about the rise and fall of some of these coins. It seems to oftentimes tie to military losses and the inability to maintain one's military. But you point to some really interesting cases for the decline of Rome's coin and it almost I think connects a little bit to thinking about in our age of post pandemic. Could you talk a little bit about how Rome experienced its decline of its currency? The kind of the unusual causes related to both the production of silver, but also just the contact that led to pathogens.
- [10:49]
A
So I draw a distinction between the Roman Republic and the Roman Empire that followed. What I think was really critical for the stability of the Roman denarius and its widespread circulation for centuries was the political system. That there was a Roman Senate in which property owners who had an interest in the stability of the economy and the stability of the money had voice. There were interests, independent mid level bureaucrats, the tresviri, who oversaw the operation of the mints and reported to the Senate. So there were in effect checks and balances on the operation of the system that preserved its stability. With the transition to the Roman Empire and an all powerful emperor, those checks and balances were compromised. The crezviri were subordinated to the whims of the emperor, starting with Nero, who had to deal with the great fire that burned down much of the city of Rome, who had aspirations to build himself a 300 room palace, who was fighting military battles on pursuing military adventures on multiple fronts. So the temptation to debase the currency in order to divert more resources toward his preferred uses became irresistible. And that inaugurated the debasement of the currency. In other words, the Roman denarius became lighter, it contained less silver, its stability was called into question. And one debasement led to another, leading to the downfall of Roman coin as a global unit. There were other elements at work. Those military adventures sometimes coincided with the spread of epidemics. So the soldiers would bring back bugs with them from their foreign campaigns. And that was arguably another factor in the general decline of the Roman economy. Economic decline, military decline and monetary decline obviously tend to go together.
- [13:32]
B
The other thing you talked about that I found so surprising was how in the process of refining silver there was lead exposure that know arguably led to a decline in IQ points and might have also had an impact. I find this theory quite strange and bizarre. What were your thoughts when you encountered this idea.
- [13:54]
A
So I found it provocative. And insofar as lead poisoning and its consequences can be amusing, I found it a bit diverting. So in order to convey a serious message to your audience, you have to carry that red thread all the way through the book. You have to tell stories about people, but you also have to have diverting anecdotes. And this I regarded as an interesting connection between coinage, refining the silver needed to produce the coins, and economic decline. So I thought it was worthwhile to put it in the book, although the idea is really based entirely on one or two scientific articles of recent vintage.
- [14:50]
B
Afterwards, there's other coins like the solidus and the dinar, and oftentimes these are coins attached to large, powerful empires. But. But I find, what I find quite interesting is your chapter on the Renaissance and the rise of the Florentine gold, Florian, because it's not attached to an empire, it's a. It's a city state. And it seems to kind of go against, you know, be maybe the exception that proves the rule, in a sense, for what one would expect for a currency that's. That's treated as a reserve currency. So how did the, how did Florence become like this hub, this. The center of international banking?
- [15:32]
A
You're quite right that virtually all the other cases in the book, after Florence comes the Dutch Republic and Gilder. The Dutch Republic had the East India Company, which was a powerful commercial venture, but also a powerful paramilitary. Britannia ruled the waves in the 19th century. The United States had its unipolar moment in the 20th. But Florence and the Florin were different in that Florence was a city state that didn't have command over a large territory, therefore, or extensive natural resources. So it had limited military capacity and was ultimately overrun by foreign militaries. But what it did have was the first real multinational banking. So that arose out of those same limited resources and commercial imperatives. Florence's economy was based on finishing woolen cloth, importing raw wool from northern Europe, from Flanders and England, and cleaning it, dyeing it, finishing it, exporting it. And to do that is it had to pay for that raw wool. So the wool merchants set up agents. Ultimately they had offices, branches that became bankers in these far flung places. And once they became expert at moving money across space, now without the need for actual physical movement of the coin, you know, shipping gold or silver coin across space is risky because there are bandits and you've got to hire big men with spears in order to protect it. So if you can do that in a bookkeeping way, transferring funds on A ledger. Instead of having to transfer the coin, you have a leg up on the process. Once the Florentines figured that out, along with some other Italians, the Genoese, the Venetians and so forth, they became bankers to the Pope as well, bankers to the English king. So they were able to leverage that financial expertise. Transactions with the English king or with Pope were often done in Florence's own native currency. That's what their bankers found convenient and preferred. So that encouraged using the physical coin and the bookkeeping Florin across Europe
- [18:35]
B
and obviously its influence across Europe was quite significant. It even was found that fluorines were found in the Middle east and used far beyond the this city state. But it wasn't until Spain that you actually see the, you know, what might be considered the world's first global currency because of the, you know, the silver mines that were discovered and then, you know, obviously made vastly changed the amount of silver available to produce coins. So what was the impact of Spain's conquest of parts of the New World and their discovery of these silver mines? How did that impact global currency?
- [19:21]
A
I argue in the book that Spanish silver coin, Spanish pesos or Spanish dollars as they were referred to in North America, pieces of eight, because these silver coins were cut up into eight pizza shaped slices to provide small change. Spanish silver coin was the first true global unit, first true global currency in that it circulated widely in Spanish America, in North America, in Europe and in Asia alike, on essentially every continent. Because of its sheer volume and because the coins were of a size and value that was convenient for a variety of transactions. Gold coin was too precious to be convenient in China, for example, for everything except the largest value cross border international payments. This in a period when China was not engaged in a lot of cross border business. So what cross border business they engaged in, they exported merchandise, commodities and imported Spanish silver coin. The coin was important for integrating the world economy in a way that it had never been integrated before. So officially this coin was supposed to be shipped from or the silver itself from present day Peru and Bolivia to Cadiz in Spain. But substantial amounts were smuggled to the Netherlands and other parts of northern Europe from which they were re exported to Asia in return for merchandise. And there were also the famous Manila galleons where a couple of times a year Spanish sailing ships would travel from Acapulco to Manila in the Philippines carrying mainly Spanish silver, but also other merchandise. That silver was then offloaded and shipped to other parts of Asia, including but not limited to China. So it kind of unified, integrated the world economy in A way that it had never been integrated before. It's interesting that it was also kind of a retrograde monetary arrangement. Recall, the Florentines earlier on had already figured out how to do business across borders using ledger money or bank money. Here we are reverting to physical money, to physical coin. It's here abundance and convenience allowed it to dominate despite the fact that other economies had already developed alternatives.
- [22:37]
B
Right. And you know, there are some, some facts that you, that you mention in the book that I found very surprising. I mean the currency was in use, you know, long after Spain began to decline as a, as a power and it was considered an official US currency for the first 70, 80 years of the United States. Congress extended its use multiple times because they couldn't really seem to get the mint up and running effectively. Long before the British pound or the sterling and the US Dollar become dominant, the Dutch have their entry as becoming the next global currency reserve through the guilder. How did Amsterdam seem to kind of grab the mantle, surprisingly from Spain?
- [23:26]
A
One last word on Spanish dollars. You're right about how long it persisted and how long it circulated in the United States. So we celebrate Alexander Hamilton who established a mint in the 1790s. We celebrate him because of a famous musical among other things. There wasn't enough precious metal in the United States before discoveries of gold in California and silver in Nevada in the 1840s and 1850s. So Spanish silver pieces of eight were still widely used. And they had imprint on the front of a pillar with kind of a snake woven around it in the shape of the present day dollar sign. So our dollar does. Oh also its symbolic form to Spanish silver coming to the Dutch. They were a trading powerhouse because of the East India Company and they were a significant military force as well. Despite the home economies relatively small size, they also had some of the most sophisticated financial markets in the world. In the 17th and 18th centuries they established what was arguably the first central bank, the bank of Amsterdam, established by the city, the city fathers of Amsterdam, not by the Dutch Republic per se, but it still functioned as a proto central bank providing liquidity services to the market. So all kinds of financial transactions involving Dutch merchants themselves, but also involving merchants from all over Europe and further flung economies went through Amsterdam because the liquidity and stability of the guilder were effectively guaranteed by the bank of Amsterdam. I recount a story told by the Swedish economist and economic historian Eli Heckscher for your economist listeners of the Heckscher Ohlin International Trade Theorem about how transactions in timber and other things between Russia and England were intermediated in Amsterdam and settled in Dutch guilder. The other thing that is noticeable about Dutch currency and financial policies in the period is that the guilder became essentially the first fiat currency. After a certain point in time, certain holders and users of the guilder were no longer able to redeem them on demand for gold or silver at a fixed price. And yet the depth and liquidity of the market in Dutch gilder meant that it was. And the stability of the gilder meant that it was still attractive to users and still widely used internationally, despite the fact that it was now and irredeemable inconvertible fiat currency.
- [27:07]
B
Yeah, and that, that, that is really interesting because that, you know, like you said, it's kind of an innov. You know, they, they, they built on the innovations that the Italian bankers had sort of started that then was, you know, briefly interrupted by this just discovery of major deposits in, in the new world. And you know, you know, the story of course, with the, the sort of the decline of Amsterdam, they of course end up falling victim, like many global reserve currencies to war. And it leads to bankers in Amsterdam to flee to London in 1795, which then kicks off this period of London becoming the kind of the banking hub of the world. And could you talk about the rise of London as the center of banking? Obviously they have a similar story in the sense that they dominate, dominated global trade through their own East India Company. But how did London really build itself up and what allowed them to essentially control be the mantle for the global reserve currency for so long?
- [28:14]
A
I think it starts with the Industrial revolution and also with the fact that the bank of England was already there as a central bank and from 1825 or so as a lender and liquidity provider of last resort again to backstop markets in pound sterling instruments. It starts with the Industrial Revolution because that revolution makes Britain the largest, most powerful economy in the world until it's overtaken by the United states in the 1870s or so. The Industrial revolution in Britain is not pan British. It's a regional phenomenon concentrated in parts of England and Wales. So to finance investment in factories, you had to move money from the agricultural parts of England to the industrial parts of England. And financial infrastructure banks, metropolitan banks in London and country banks in the countryside begin to deal with one another in response. So country banks and agricultural regions send money to London and the metropolitan banks in London send it, invest it in the industrial regions. So what works domestically is what developed domestically this ecosystem of country banks, metropolitan banks, dealers and Brokers in commercial paper, bills of exchange, the kind of instruments that banks originate, that develops for domestic purposes, but it is repurposed for international purposes from the 1810s or 1820s. And at the same time, London is benefiting from this influx of bankers with international experience, from the Netherlands, from bankers from Germany like Nathan Rothschild, who moved to Manchester to engage in the cotton trade, there's that cotton textiles, there's that industrial revolution again, but then moved to London and become multinational bankers. Finally, as I said, this market works because of its diverse ecosystem of different players, but also because the bank of England is there to backstop it, ensure its liquidity and stability. So the bank learns a hard lesson about the importance of doing that and how to do it in financial crisis of 1825. And it has to intervene repeatedly thereafter. Its interventions are important for reassuring foreign investors and users of the stability of the pound sterling and of its integrity, if you will.
- [31:34]
B
Yeah, this sort of status of the bank of England acting as this lender of last resort is, is this, you know, as they're, they're sort of figuring out this model to protect the value of the currency. What does this mean for its denomination in terms of gold? Or is it, is it essentially, you know, operating as like a quasi fiat currency at this point? How are they ensuring that their gold reserves don't deplete?
- [32:01]
A
Well, so sterling is convertible into gold at a fixed price from 1717, when Sir Isaac Newton is appointed to clean up disordered affairs at the Mint and sets the price of gold too high and the price of silver too low. Newton solved a number of other problems, but he didn't solve the problem of bimetallism, keeping both metals in circulation. So Newton's mistake puts Britain on the gold standard, where it remains thereafter with a brief two decade long interruption during the French and Napoleonic Wars. When crises come along in the 19th century, Britain has to suspend the convertibility of sterling into gold. That's one of the ways it protects and maintains its gold reserve. In extreme circumstances it waives the rules, but it always then goes on and restores the earlier link between sterling and gold, the earlier parity or price of gold. So that restoration rule is part of what makes the maintenance of convertibility over a long period feasible, but also reassures investors that fundamentally the bank of England and the government will not tamper with the value of the currency.
- [33:37]
B
England is, its economy is growing considerably because of the Industrial Revolution. It's also beginning to expand its empire across the globe, taking new territories in Africa and elsewhere. And you also Talk a little bit about there's almost this brain drain away from manufacturing into finance, which you know, I think I would love to talk about that a little bit when we start talking about the current, you know, situation of America and some of the debates around, you know, what's going on with, with our, the future of our economy here. But I want to just jump across the ocean to the United States because you start looking at the, the dollar and the various occurrences going on that are like leading eventually to the dollar to taking the place of, of sterling and you, you kind of frame this section around different figures that of importance and I think you're, you're highlighting some very interesting people. Like the first person you talk about is Paul Moritz Warburg. And I was wondering if you would introduce him and his importance to helping essentially set up the United States to basically be in a position bank from, from, you know, develop the same kind of banking system, obviously quite different, but develop a banking system strong enough to backstop the do dollar.
- [34:55]
A
So Warburg is a member of a German family engaged in international banking business in Hamburg, Germany primarily who migrates to the United states in the 1890s, I believe and discovers to his surprise that the dollar plays no international role. That the cross border banking activities with which he was familiar as a banker in Hamburg, having been posted London by his family bank. There is nothing resembling those practices in the US that US Exporters in order to get credit for their, to get paid before while their goods are in transit have to ask their US bank to get in touch with a London bank, a correspondent bank and that trade credit is denominated in the London bank's currency in the pound sterling. The dollar plays no international role. And Warburg soon concludes that this fact is handicap for US exporters and importers. They bear currency risk because the dollar pound sterling exchange rate can move and their liabilities or their income coming due is denominated in somebody else's currency. So he mounts a campaign, if you will, starting in the first decade of the 20th century to internationalize the dollar to promote markets for trade credits and foreign investments denominated in US dollars. He writes editorials for the New York Times. He talks to other influential bankers and politicians. He is invited on the sly to the secret meeting of half a dozen influential bankers and political figures in 1910 on Jekyll island off the coast of Georgia, where they devise a blueprint for what became the Federal reserve system in 1913. Warburg was a relatively shy, unassuming individual with powerful views, working primarily behind the scenes, he then gets appointed as one of the founding governors of the Fed in 1914. But his influence, I think was much greater than his public profile.
- [37:45]
B
Yeah, he's not a person I was actually familiar with and I do think that the debates around establishment of the Fed are interesting and I'm kind of curious, you know, just to kind of connect a little bit with the overall podcast themes around, around bullshit is there's so much conspiracy, there's so many conspiracies around the founding of the Fed. And I'm just wondering if you, you know, have any thoughts or comments on, you know, if, if you, if you see any, you know, a grain of truth to the conspiracy. Conspiracy thinking or if you know, ultimately like this was a, a kind of a necessity inevitability. Because I've always in a way read the, the creation of the Fed as like it was something that, you know, was, was necessary at the time. Obviously there were lots of reforms that took place later that changed the way that the Fed operated. But how do you think about the founding of the Fed and some of the conspiratorial thinking around it?
- [38:40]
A
So I'm not a conspiracy theorist. I think there were fundamental reasons for creating a central bank in the United States. There were two. Number one, a central bank was needed to manage the periodic financial crises that were a problem in the US the 1907 financial crisis had been managed essentially by a private citizen, a wealthy banker, JP Morgan, who clubbed together the other New York bankers and collectively solve the problem. And number two, to internationalize the dollar, as I described a moment ago. While I'm not a conspiracy theorist, it is true that there is deep and abiding suspicion of banking, and central banking in particular, in the United States. Andrew Jackson had refused to renew the charter of the earlier bank of the United States, which went out of business, therefore in 1836. And one of the main congressional figures in the debate about the founding of the Fed, Carter Glass, representative and then senator from Virginia, was similarly very suspicious of bankers. And he wanted a decentralized Fed with 20 regional reserve banks and no central authority essentially in Washington D.C. as a way of defanging this new central bank. So hostility and suspicion toward the Fed, absolutely. Conspiracy behind its founding, not so much.
- [40:24]
B
We don't need to get into the full depths as to why the conspiracy exists. I think there's obviously it's a mix of anti Semitism at the root of it and other, like you said, just general suspicion of bankers. But it's the founding, of course, is very interesting and I think Warburg and these other figures had just a massive impact, long running impact on the eventual status that the dollar has today. And I'm realizing now what you end up covering in this section, it's a miracle that you're able to fit it into around 70 pages because it's just as you pointed out, there are so many libraries have been filled writing about just this period alone from the founding of the Fed until the Bretton Woods Conference where the dollar actually officially sort of becomes the world's global reserve currency. And you then take up the character of Harry Dexter White, who's just an endlessly fascinating figure. He was the American counterpart to Keynes at the Bretton Woods Conference. And I sort of you to introduce Harry Dexter White and his role, his influence in eventually helping to establish the dollar as the global reserve currency.
- [41:42]
A
Hering Dexter White was a failed professor. That's a little bit unfair. He wrote a masterful award winning Ph.D. dissertation at Harvard on the classical gold standard before 1913. And then he, as you echoing something you just said, he suffered from antisemitism at Harvard when he got onto the faculty. So he was exiled to a professors in Appleton, Wisconsin. And that led him. He jumped at the opportunity to get back to the center of things by joining the U.S. treasury Department and rose through the ranks, became essentially the architect of the dollar centric Bretton woods system that emerged out of the Bretton woods Conference in 1944. He saw something along the lines of a modified gold standard where there was a bit more flexibility built in. And at the center of the system was not only gold, but the dollar, the only currency left standing, if you will, after World War II. They would be the sun around which the other currencies revolved. And that was an important element in the dollar's emergence as far and away the dominant global currency after World War II. The Bretton woods conference, as is well known, featured kind of a boxing match, figuratively speaking, between White and John Maynard Keynes, his British counterpart, who had a somewhat different vision of what the post war monetary system would look like with a less important role for the dollar and a more important role for a new global currency. He envisaged bancor maybe or, or being French for gold, bankgold if you will. Bancorp never came into being because I think until we have a global government, we're never going to have a global currency. When people talk about global monetary reform and what will come after the dollar, some people imagine a global currency. I cannot imagine on the other hand
- [44:14]
B
going there Yeah, I think that predicting the future of, of what the world looks like after the dollar, because it does seem, based on the history that you've written about, it is just an inevitability that at some point in the future, be it in 20 years or in 200 years, that eventually the dollar's day in the sun will pass. And that can look very different. Obviously there are many different, certain currencies, they still exist to a certain extent that you've written about here. Others are long since gone. Gold obviously still has a value and it's higher value than ever before. And after Bretton woods, there's obviously this period where the dollar is backed by gold and there are all sorts of restrictions in terms of global finance. And eventually I feel like this has been discussed and written about so much, eventually dollar convertibility to gold is removed by Nixon. And you know, people have been writing about this, the concerns related to the US gold reserves being plundered. And why didn't the removal of the US dollar, you know, the US dollars, you know, being fixed to gold, why didn't that then lead to the decline of the dollar as the global reserve currency?
- [45:41]
A
The answer is that the dollar was the incumbent international currency. And incumbency is an advantage in monetary, global monetary affairs like it is in elections. And after a difficult period in the 1970s, US economic policy was not that bad. Our debts were low by 21st century standards. Paul Volcker came along and price stability, low inflation was restored. After Volcker we enjoyed what economists refer to as the Great Moderation when business cycle fluctuations diminished in the United States. So all of those factors, along with the absence of full fledged alternatives, continued to support the dollar's incumbency.
- [46:35]
B
Yeah, and the, I can't remember the exact figures, but you know, since the, since at least the 60s, there's been quite a decline in terms of, you know, the US's position, global, you know, percentage of global GDP. Obviously, you know, the dollar still used to a significant degree in international transactions, but this is, this is declining and there are, there are new competitors. The kind of, the main major competitor for a long time though its status is, has come into question quite a bit is the Euro. Why has the Euro not been able to be fully competitive with the US dollar?
- [47:18]
A
For three reasons, I think. Number one, markets in euro denominated securities assets are not liquid. They're not as liquid as markets in U.S. treasury bills. They're divided between German bonds and Italian bonds and French securities. Europe hasn't completed a real capital markets union where all These securities are interchangeable and easily traded. Number two, there's a shortage of safe assets in Europe. Safe securities are kind of the bedrock of investment portfolios. Investment portfolios of central banks, commercial banks, corporations and others. Only three European governments have AAA ratings from all the rating agencies. Germany, the Netherlands and Luxembourg. That problem could be solved by financial engineering. The bonds of other countries could be sliced and diced to create a safe cross and a risky cross. But while the financial engineering is easy, the political engineering is hard. And number three, Europe doesn't have a common foreign and defense policy. So I think there still is that connection between geopolitics, defense policy on the one hand, and the strength of one's currency on the global stage as on the other. So Europe now sees the downside of reliance on the dollar now that the US is no longer regarded as a reliable partner and it's moving as fast as it can to rectify these three deficiencies. Problem being that as fast as it can is not very fast.
- [49:18]
B
Yeah, the pace of action does seem to be a little slower in Europe, maybe a lot slower in Europe than United States. For better or worse, we certainly speed head first into the future. And what's oftentimes treated as the next big competitor is China with its renminbi. I have to be honest, I find the currency situation around China and just the overall banking situation extremely mystifying. I don't quite understand, you know, how their banking system operates despite my attempts at learning. So what are your thoughts on China as a potential successor to the United States?
- [50:03]
A
A first observation would be that China starts out way behind the United States as a global currency competitor. The US has been trying to internationalize the dollar for more than a century. China for only 10 or 15 years. The dollar accounts for half of all cross border payments. The Chinese renminbi for maybe 2 or 3%. So they have a long way to go. Even if use of the renminbi in cross border transactions grows at double digit rates, and I have my doubts that anything in China going forward will grow at double digit rates. Their financial markets are not fully open to the rest of the world. They still have controls of various kinds and they are a political autocracy where President Xi and the Politburo can wake up tomorrow morning and change the rules of the monetary and financial game so that renders foreign banks, firms, governments reluctant to park all of their reserves in Shanghai. This is an argument I've long made when I go to China that every leading international and reserve currency in history, with the possible exception of Spanish silver coin has been the currency of a political democracy or republic where there is a division of powers, rule of law, checks and balances on arbitrary action by the executive. So I've long made that argument when I go to China. I now make that argument when I talk about the United States and the dollar.
- [51:51]
B
Yeah, and you know, there have been, there are lots of opinions right now about what's going to happen to the dollar and obviously, you know, various attempts. I'm wary of even talking about like the most recent things that have been said, you know, in regard to, you know, the Fed's independence or, you know, even in terms of like, how much spending is going to, you know, how much spending is being planned for defense. Because it all feels so up in the air right now. This, this conversation be out of date by the time it goes live. Like you, you had that. You have a line where you note, and I, I completely forgot this, that Pete Hegseth said that the, they were going to reduce the defense budget. Obviously we're now in a position where they're, they're seeking to expand the defense budget quite radically. So obviously one of the biggest stories too with the US Is just this declining industrial base and the attempt to reshore the challenges related to an extremely strong dollar. What do you make of the attempts to depreciate the dollar relative to other currencies? Do you think that this sort of rebalancing is not necessarily an inevitability, but something that is desirable in the long run?
- [53:04]
A
I think the rebalancing of the global monetary and financial system is inevitable, that emerging markets will continue to emerge, and it's only logical that the weight of the United States and the global economy will continue to decline, albeit gradually. I don't find that particularly alarming. If the transition to a more multipolar system where the dollar shares the global stage with other currencies is gradual and, and smooth, I think that will be a good thing because there will be multiple sources of liquidity available to the global economy. So if the Fed is no longer permitted by its political masters to provide liquidity through dollar currency swaps to the European Central bank and other central banks around the world, there will be alternatives available to them and these other sources of liquidity. If the transition is sudden, abrupt, it will then therefore be bumpy and worse than bumpy, it could constitute a serious threat to 21st century globalization as we know it. So on the one hand, I'm relatively sanguine. On the other hand, I'm relatively alarmed.
- [54:32]
B
Right. And as you point out, there are several other currencies that are quite, seen as quite reliable, you know, that are, that are backed by, you know, like Norway and New Zealand, you know, other smaller countries. So that there is a, you know, to a certain extent, I guess a degree of multipolarity already. And you know, the, the, the one thing you also discuss a bit too. But I think also, you know, there's, there's lots of different opinions on, on this and still, you know, we haven't exactly seen the development of central bank digital currencies, but is the prospect of cryptocurrencies. And obviously there are people that are these bitcoin evangelists that think that Bitcoin is going to become the global reserve currency and it's going to fully separate currency from the nation or from empires or from political power. And what at least I feel like I've seen in this whole history that you've written is that for the most part currencies are always attached to either the global superpower or in the case of Florence, a city state banking power. That's relative, you know, that, that works relatively efficiently as a political entity. So do you feel that this would, you know, this would just be something that would be highly unlikely given its history or you know, as we've seen before, you know, potential innovation that really could change the nature of money moving forward.
- [55:57]
A
So another cross cutting theme of the book is the importance of changes in financial technology. That financial technology is always changing and the country or economy that is able to capitalize on that new technology tends to be in the driver's seat when it comes to international currency competition. So today I think what we know is that technology, digital technology is changing again and distributed ledger technology, blockchain is here to stay. It provides a new set of payment rails for engaging in cross border transactions. And what we don't know is what unit will run on those rails will be used for those payments. Will it be plain vanilla cryptos? I don't think so because bitcoin and the like are too volatile. Will it be stablecoins, privately issued digital tokens that are issued by banks, tech companies and big retailers like Amazon and Walmart? I don't think so because I think the arrow of history points in the other direction, away from private monies toward public provision of the public good of money. I think what is coming is a combination of central bank digital currencies, effectively digital tokens issued by central bank money that runs on blockchains and tokenized commercial bank deposits. Bank money like that to which we're accustomed that is transformed into digital tokens that similarly can be moved between accounts on blockchain. So that would be my guess of where we're going. And that could open up alternatives to present practice of when you when an entity wants to make a cross border payment, he or she has to have their bank correspond with a US bank and do the business through the dollar. These digital payment Rails distributed ledger technology will make it easier to do these kind of payments directly between the Brazilian real and the Indian rupee or whatever.
- [58:25]
B
Yeah. And I think anyone who's had the experience of doing cross border payments, it seems like it would be easy, but it's actually quite complicated. It's always something that's shocked me. This book, obviously we ended up covering a lot, but also having to gloss over quite a bit. But I do think that it's an extremely valuable history. And, and it's, you know, it's readable for, for anyone from people that are, that are economists or economic historians to anyone that just is curious to learn more about money. And I think as, as always, you know, learning the history of something is I find the best entry point into understanding our, our present moment. So I think that this is a great, a great book for anyone looking to understand a bit more about the future of the dollar, the future of global currencies and. Yeah, just Barry, I wanted to thank you so much for being guest on the Truth about Bullshit on the New Books Network. It was really wonderful to speak with you.
- [59:22]
A
It was fun. I didn't know the title of the podcast until now. Great way to attract listers.
- [59:32]
B
You gotta do it somehow.