Does the US really make the dollar? Has it ever?

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MARK BLYTH: From the Rhodes Center for International Economics and Finance at Brown University, this is the Rhodes Center Podcast. I'm the Director of the Center and your host, Mark Blyth. This is a special episode for me. I have with me in the studio today, Brendan Greeley, a journalist and former US economics editor at the Financial Times, where he continues to write a regular column. Recently, however, Brendan decided to go back to school. He's currently finishing up his PhD in history at Princeton, specializing in the history of money and finance. Brendan, welcome to the podcast.

BRENDAN GREELEY: Thank you.

MARK BLYTH: So quick note to everyone, Brendan and I, 10 years ago, used to do a podcast together. You can probably still find it on the archive somewhere, which is Alphachat for the Financial Times. And the guy who's doing the recording here was basically brought in to do this at the same time. So basically, we're getting the band back together with this podcast.

BRENDAN GREELEY: It is a great irony of my life that you and I are the only two bros in America without a podcast.

MARK BLYTH: I know. And consider it 10 years ago, we had the podcast.

BRENDAN GREELEY: Exactly.

MARK BLYTH: But the reason we brought him in today, dear listeners, is because Brendan has a book, The Almighty Dollar: 500 Years of the World's Most Powerful Money. We just had a great talk here at the Rhodes Center at Watson. And in the studio with me today, we have special guest stars. Aditi Sahasrabuddhe, you've heard her on the podcast that we did a couple of months back, also on the dollar, on another book-- and Jamie Martin, who's a historian from Harvard, who came down for the talk because obviously things are better at Brown. And with that, we will begin. Brendan, why did you want to write a book about the dollar? I mean, it's a bit done to death, isn't it?

BRENDAN GREELEY: Well, let's be honest. I wanted to write a book about the dollar because an editor at Crown asked me if I wanted to write a book about the history of the dollar. And as a journalist, when you're asked, do you want to write about something, your job is to say yes and then you figure it out. So my basic attitude was, I have a phone. I can call people. I'll figure it out. I'll do it. What happened was I fell down a rabbit hole or a rat hole. Depends on how you want to describe it. But I began, as I was doing my research, to be dissatisfied with the explanations that I found.

MARK BLYTH: What are the standard explanations?

BRENDAN GREELEY: Well, when you look at the history of the dollar, you have what I started calling a Seventeen Seventy-Six problem. When you look at the revolution, you've got new country. We tend to assume monetary sovereignty-- new country, new money.

But that's not what happened. So when you look at what the new country actually chose as its money, as its currency, they peg their dollars both during the revolution and after the revolution and again after the Constitution-- they peg their dollars to a silver coin.

Silver comes from Mexico. The coin is stamped with the imprint of the Spanish empire, and it has a German name thaler - dollar. Very difficult to square that with the assumption that the history of a currency is just the history of a country. And I had assumed that sovereignty matters.

You can start a new country when that new country-- so if we start Brendanlandia, we're trading, now I'm going to call the money Greelies. Brendanlandia does its accounting in Greelies. That doesn't seem to be how things work. And it wasn't how things happened in the United States.

Once you realize that, you have a huge problem telling the story. Because what was a Spanish coin with Mexican silver and a German name doing in the American colonies? Why was it the most dominant money? Why weren't they using shillings?

MARK BLYTH: Why don't you tell us, rather than just asking endless rhetorical questions?

BRENDAN GREELEY: I miss doing podcasts with you. So when we look at the derivation of the name dollar, you start with Joachimsthal, which is a valley in Bohemia. The coins from that valley were called joachimsthaler in German, that got shortened to thaler-- and then in Dutch, daalder-- and then in English, dollar.

So there is a standard story. I didn't uncover this story. I just wrote it in a slightly different way that says Stephan Schlick was the count in Joachimsthal, and he had so much silver that his money became global money.

He wasn't really the count. It wasn't really his silver. And so the story-- and here I'm relying a lot on work by a Czech numismatist, Petr Vorel. But his argument is basically that Stephan Schlick was not the count of St. Joachimsthal, and in fact, he was a dirtbag who held the property in entirety with several of his cousins and his brothers. But he decided once silver was discovered, that it was just going to be his. The problem is he knew already silver in the ground is not silver in your hand, very expensive to get it out of the ground. So in order to do this, he needed expertise and capital. And both of those came from Saxony, over the border.

So he went up to Saxony and invited some Saxon investors and some Saxon mining captains down, and they took a look at the valley. He dressed them up as a hunting party so that nobody knew what they were doing, and they just started mining silver, breathtakingly illegal.

Very importantly, what they produced was silver coins-- big, full-value silver coins. They were not supposed to be money, crucial. If you were Saxon mining investor at the time, what you expected as your payout, as your dividend was a big, full-bodied coin, too big to buy anything in a market. It was really just for moving silver in and out of silver markets. That's all this mine produces. Because it's illegal, there's no obligation at the mint, at the mine to produce little coins for small purchases. Just this flood of big, high-quality coins are going straight from the investors into silver markets in Leipzig.

So it's actually not his sovereignty, Stephan Schlick. It's his lack of sovereignty. And he eventually becomes unimportant. He's replaced by a more competent mining captain, who eventually just takes over the whole town. He can't seem to run the books very well on the mountain. The miners strike because he can't import enough pennies to pay them for their labor. Eventually, they burn the town.

Eventually, he then either dies or is taken prisoner at the Battle of Mohács by the Turks. There are some rumors that he was sold into slavery in Armenia. He just disappears from the story because he doesn't matter, because he wasn't sovereign. But this productive mine continues to crank out just these very large silver coins because it's in everybody's best interest.

MARK BLYTH: But how does it end up in America?

BRENDAN GREELEY: Well, this then begins to define how silver moves in the Baltic economy, and then in Northern Germany, and then through Antwerp, where silver is leaving Europe to go to China. There's huge demand for silver in China. Spain discovers silver in what are now Bolivia and Mexico. But Phil II and Charles V, the kings of Castile in charge of the new viceroyalties in Latin America, they do not have the power to determine what that silver looks like when it goes into global markets. So they are then forced to copy the joachimsthaler.

So what we think of now as a Spanish piece of eight is an explicit copy of the joachimsthaler. It had not existed in the domestic monetary system. There was a real. The eight-real piece in silver was really only to just create something that looked like a joachimsthaler so that Charles V and Philip II could also sell their dollars out through Antwerp, and again, immediately recognized in English as dollar.

Late 16th century in English, we already see mentions of a Philips's dollar. They saw it for what it was, a dollar. So this then becomes the standard coin of the Atlantic empire. It is a global standard, arguably the first global standard of money. So the American colonies are the smallest, tiniest backwater in this economy. It is hard to describe to Americans how unimportant the colonies were economically at the time of the founding.

And so there's no domestic source of silver. There's no domestic source of gold within the colonies. England can't really be bothered to make sure that there's a good coherent domestic monetary system. And so the colonists have to invent various ways of producing their own money. They're also desperate to get dollars, these silver dollars. Again, they know them for exactly what they are. They see them as the same thing that came out of Northern Europe, the pieces of eight that come up from the Caribbean when American colonists sell wood, wheat, hogs, salted cod to the sugar islands of Barbados and Jamaica.

So at the founding, it was very clear to the founders when they talked about creating a currency, that they were pegging the American currency to this silver dollar that was coming up from the Caribbean with trade. And so for me, taking in that entire story, unfortunately calling you every two weeks to make you help me figure it out while I was writing it, really just shattered the idea that a country is in control of its own currency. And so I began to think, when we look at then, if we run that forward.

Since the founding, I think of monetary sovereignty as possible, but it's hard to establish and it's constantly slipping away from your grasp. People are very inventive about the kinds of money that they create. It's very difficult to control them. And what you generally find is the state is not generating money. It's chasing after people who are generating their own money and trying to bring them into the regulatory system just to make sure that the money continues to have value.

MARK BLYTH: So is it fair to say then that America stumbled into the dollar?

BRENDAN GREELEY: I think of America succumbed to the dollar.

MARK BLYTH: Oh, so I like that, succumbed to the dollar. So let's say it succumbed to the dollar. You get past the inflationary crisis of the immediate post revolutionary period, and then Americans start to need and want their own money. Particularly, we call it a dollar, but this is when we start to get into what we call the era of free banking and so on. How does that fit into the story of the dollar?

BRENDAN GREELEY: So before the revolution, and again after the revolution, states and colonies printed their own shillings and dollars. They were sometimes inflationary. Particularly, Rhode Island seems to have been legendarily bad.

MARK BLYTH: Legendarily bad, it printing its own money. But there were-- over the course of the 18th century, colonies and then the states after the revolution had developed a set of best practices of making sure that these worked, various kinds of things, like sinking funds where you would issue the paper shilling or the dollar, and you would at the same time levy a tax or port duty that would take in coins so that you can buy those dollars back on schedule or those shillings back on a schedule. So there were various ways of doing that. That wasn't the only way of doing it.

BRENDAN GREELEY: And that worked, again. So I don't think we can think of the Articles of Confederation as an inflationary mess. Those practices were reestablished after the revolution. What happened in the Constitution was merchants, particularly in Philadelphia and Boston and New York, did not like state money. They did not because to them it was inflationary. It was produced for different people, for different reasons. And they wanted to replace it with bank money.

So the word bank is not in the Constitution. But what is in the Constitution is a ban on states issuing their own bills of credit, the old shillings and dollars that they had been printing. They couldn't do it. They were shoved out of that business. That was a political decision. We tend to see that as a piece of housecleaning, creating a common currency. But what it actually did is it said you can't have the state monies. It's going to have to be the banks.

What do states do? Very quickly, they turn around. They start chartering their own banks. They realize that they're going to need money to circulate domestically, so they start chartering their own banks. We don't have a currency union in America, I don't think, until Nineteen Thirty-Two. What we have is islands of banking systems that are regulated by states that periodically blow up, sometimes state by state, sometimes altogether.

And so when I think of the 19th century, I think of America slowly learning by doing, how do we issue banknotes? Banknotes are just a continuation of old kinds of promises on paper. It's a promissory note issued by a bank. And sometimes you can see them physically managed in the same ways that promissory notes were, with marks and signatures from the treasurer.

But after every banking crisis in the 19th century, you get new regulations. So after Eighteen Thirty-Seven, we get better bank reporting. It's very hard to see what's on a bank balance sheet before Eighteen Thirty-Seven. Afterwards, regularly, states are sending reports to Congress. You can get these and figure out what's on balance sheets. States start having comptrollers. They start moving into free banking.

So they had had a charter system where you needed to have pull with the legislature to get a bank charter. After that, they say the charter system is not working. Bad banks are blowing up. Anybody can have a bank as long as you follow the rules.

Eighteen Fifty-Seven, when we think about the Civil War, often we talk about the greenbacks. It's the closest that we've ever had to a pure fiat currency in America. There is a promise of a sinking fund, that they're going to pay it back in gold, but it's a weak promise. It's poorly observed. There isn't really a gold fund to do it.

But in addition to the greenbacks, and I think far more important, was that there was a new national banking charter. So states had been the ones to charter banks. After the Civil War, if you wanted to issue a banknote, you had to have a national bank charter. You had to be overseen by a national comptroller of the currency, and you had to hold 100% United States treasuries against those notes. So that's a huge shift.

But again, we're still living in the universe of notes and deposits that are generated, as an economist would say, endogenously by banks. I see no fiat. I see the slow accumulation of experience, crisis after crisis, that eventually gets us-- the Fed after the Panic of Nineteen Oh Seven-- that eventually gets us the FDIC in a more politicized Fed after the bank failures of Nineteen Thirty-Two.

MARK BLYTH: So you mentioned the e word, endogenous. Let me bring this into current debates. I just taught a class, which unofficially I call the Architecture and Plumbing of Global Finance. Aditi and I did the syllabus together. And one of the things that we tried to do, and this is set up right at the start, is the story of endogenous money as credit creation, which is basically banks make all the money that's out there and spend it, et cetera. But there's also something that's coming up next in your story, which is the Federal Reserve.

Now the Federal Reserve story that makes sense in your story is the one whereby despite doing all this best practices, et cetera, banks keep blowing up. And eventually they go, we need a really big bank to basically regulate liquidity across the whole economy. And that's it.

But when I think of central banks, I then think of the other story of money, of going back to Adam Smith and fractional reserve banking, there's a central bank that has a certain amount of money that it prints. It gives it to big banks. Then the big banks basically do deals with the smaller banks as a money multiplier, and that's it. And that's the story you get in the economics textbooks, which I think is frankly wrong.

So given what you've learned about the dollar and how it came about, et cetera, how should we think about these two stories of it's all credit creation by banks, which is obviously true? And then the central bank clearly has a role to play in money on the supply of money. How should we put these two things together?

BRENDAN GREELEY: I mean, I think that the example that you gave, the idea that the central bank creates the money and then we've got fractional reserve banking, that's history by thought experiment. When you go back and try to reconstruct the history of this, you don't find that at all. You find a different story.

I think that central banks are just big banks that do what we need them to do. And I think that there's a big argument when you look at historical central banking. And it's often, what was the first truly modern central bank? And that question is usually asked by economists. And what they ask is like, is it the lender of last resort? Does it create the physical bank notes?

And that's basically saying the thing we need the central bank to do right now, in this moment, was always the thing we needed the central bank to do, and we just had to get there. We had to get smart enough and experienced enough to do it.

A different way to think about this is you've got, between the Eighteen Thirties and Nineteen Thirteen, money creation in America from the banks without a central bank at all. So if you're going to say money comes from the central bank, you don't have an explanation for 100 years.

MARK BLYTH: For the 19th century.

BRENDAN GREELEY: You don't have an explanation for the 19th century. That's a problem. But the other thing is, when we look at what the Fed does, it drives me crazy. The Fed is a bank. There's this amazing interview with Ben Bernanke after the financial crisis, which the Fed always touts because they say everybody says that we don't do outreach, but we did that interview with 60 Minutes. And I'm going to get this wrong, but this is roughly right. Scott Pelley asks him like, well, is that taxpayer money that you're using for the bailouts? Ben Bernanke says, no, we just-- said something like, we just make it up.

MARK BLYTH: Yeah, no. We mark up a few lines in the computer.

BRENDAN GREELEY: We mark up a few lines in the computer. So Bitcoiners see this and they're like, see, we told you money was made up. Like, oh my God, no, it's just a bank. And this is cultural among central bankers.

Ben Bernanke knows how money is created. He won the Nobel Prize for describing when banks stopped creating money. But I think that central bankers are comfortable enough with the assumption that money comes from the central bank. It doesn't matter how. It just does. Don't think about it too much that they don't talk about the mechanics. And we all lose because then we lose the ability to think about how the Fed works, what the Fed should do, how it came about. Because it is a bank.

MARK BLYTH: You keep saying it but what does that mean? Somebody listening to this going, OK, it's a bank, but what does that mean? Why is that important?

BRENDAN GREELEY: At the end of the 19th century, commercial banks and state and federal government working together came up with various ways to try and make banks and banknotes safer. So you have the national bank charter where you say-- basically, it gets the state banks out of the business of making banknotes.

Part of that is explicit instructions that a banknote has to be backed 100% by Treasury. The challenge of that is it does make banknotes safer, but it gets banks out of the business of printing notes. Because you only want to print notes when treasuries are providing a high return, when treasuries aren't providing a high return, you want to get out of that business.

So you actually have this slow deflation that's not just about the gold standard at the end of the 19th century. It's because national banks with their charters don't really feel like they've always got to produce notes. They want to produce notes when it makes sense for them and when they can make a profit. Also, that's the beginning of something that we think of as something the Fed does. You also have bank clearinghouses in big cities where banks get together and they help each other out in a crisis. They pool their liquidity. And if one bank gets into trouble, they'll make the loans.

So you have the beginning of a shared balance sheet as well. The problem is you're relying on banks and cities to save themselves. They do that frequently. What they don't save is the small banks out in rural America. They do not save agricultural loans. They don't save agricultural banks-- same with the banknotes. National banks will produce banknotes, but they won't produce enough of them to be present and available for bank runs in smaller state banks.

So the Fed is just a national charter for a big bank to take all of these processes historically that were developed over time, the production of national banknotes that were backed one to one by treasuries, a central ledger of a clearinghouse that can make loans on demand, that can actually expand its balance sheet when things go bad, exactly as the banks would do for each other in these clearinghouses.

But we chartered at a federal level because what we recognized-- and the original charter of the Fed is to make a more flexible currency. It's just making sure that we can get banknotes from this big bank out to rural banks during a crisis. That's the original argument of the Fed. There's also a different argument that it was supposed to make the dollar more international. It's just too complicated to get into. So the Fed was not this deus ex machina that reinvented money.

MARK BLYTH: Yeah, nor the end of the developmental telos of central bank policy, which is the way this story gets told.

BRENDAN GREELEY: That's exactly right. And every time someone says that's not what central banks are supposed to do, my answer is says who? The original charter of the Bank of England was to carry on the war against France. It doesn't do that anymore because--

MARK BLYTH: Actually, they do. It's been ongoing for 1,100 years. It's just in a slight abeyance at the moment.

BRENDAN GREELEY: I mean, so we had to decide that central banks were responsible for bailing out commercial banks in a crisis. When you read Walter Bagehot from the 19th century, looking at the Bank of England deciding it's taking on that role, he's very clear that the Bank of England will not admit that that's its job. It doesn't want to do that. We have to tell the bank, this is your job.

So if we want green finance, I don't buy this argument that we can't use central banks to do it. Central banks are there to do what we need them to do. And if that's the thing we need right now-- all central banking is political. Money is inherently political. You cannot tell me that we have to keep the Fed apolitical, and that's why we can't do green finance. Green finance is just a new version of carrying on the war against France.

MARK BLYTH: So you've just ended central bank independence at a stroke. Well, let's jump back into the story because that was a little bit of a detour. In Nineteen Forty-Five, by some estimates, America was 50% of global GDP and 60% of capital. The world was dollar short. Everybody wanted to have dollars.

BRENDAN GREELEY: Also, 70% of global gold.

MARK BLYTH: 70% of global gold. So it's good to be the king. And that's the origins of the global dollar, is it? Or is it a different way of we should be telling the story.

BRENDAN GREELEY: I think there's this temptation to say when an empire is powerful, it's money is powerful. And we get that historically there's always this attempt. Ray Dalio has done it. Barry Eichengreen has done something like this. I disagree with Barry Eichengreen at my peril. He's the dean of financial historians. It's like disagreeing with Willie Nelson about songwriting.

But there's an argument that certain aspects of an empire make its money more powerful. And what that does is it ties a currency to an empire. I don't see that story always happening. I don't see it historically. I don't know that-- again, the piece of eight was not the domestic currency of the Spanish empire.

So to answer your question, when we look at what made the dollar so reliable as a global standard, I think what you have is foreign commercial banks in the Nineteen Sixties quietly marking up their own balance sheets with brand new dollars. And they do it the exact same way domestic banks had always done in the United States. They just do it. Banks create their own money, so banks abroad can do it too. And they can call that a dollar just as easily as domestic banks can call it a dollar.

This happened outside of the United States' permission and knowledge. So what you have is this rich and often hilarious record of the Federal Reserve sending economists over to London in the Nineteen Sixties to come back and say, you are not going to believe what is going on over there. What does happen is foreign companies sell things to Americans. They're paid in American bank deposits. What should have happened was those bank deposits should have gone through a complicated process that would've eventually generated gold. They didn't do that. They just held on to them. This is a triumph of practice over theory.

And so what happens is you've got these rock solid, federally insured deposit dollars acting as reserves in a system abroad where banks are marking up their balance sheets with brand new dollars. We still have that system today. And so it's America's willingness, once it discovered this system, to tacitly allow it.

MARK BLYTH: So it stumbled into it, again.

BRENDAN GREELEY: Yeah, absolutely. And so the global dollar system sits on top of this ocean of euro dollars that has been created since the Nineteen Sixties. So these are just offshore dollars. And so now when we look at, if we run that forward to now, if we want to talk about what dollars are globally, by estimates from the BIS, 14 trillion offshore dollars. So these are liabilities denominated in dollars, sitting on the balance sheets of banks outside the United States. There are 19 trillion domestic dollars, if you add up the Fed dollars and commercial bank dollars.

MARK BLYTH: And there's no reserves against those 14 trillion, right, in the euro dollar system?

BRENDAN GREELEY: I think the reserves are American bank deposits and American treasuries. I think that's functionally what treasuries and American bank deposits are in that system, but no explicit reserve requirements, just like the practice of bankers holding a reserve as bankers always have.

MARK BLYTH: So to go back to your story, essentially, rather than the Fed being this end of this T-loss of development, it's this thing that's a jury-rigged construction that happens. And it takes on certain roles at certain points in time. But one of the main things it does is it's the fire brigade. It's the liquidity hose for putting out the financial fire.

But you then have almost equivalent amount of dollars by the '60s, '70s, '80s, '90s, especially now being minted by banks all over the world and put into this giant slush fund of dollars from which people borrow, et cetera. That's not backed in the same way. The Fed isn't the lender of last resort for that system, or is it?

BRENDAN GREELEY: Well, kind of is. So again, you're absolutely right. I think stumbled is a good word. The Federal Reserve states in general, and the Federal Reserve now, find new forms of dollars and then try to figure out, how can we bring them into the system?

So one thing that the Federal Reserve does is that it offers swap lines to foreign central banks. So what that means is if you're a foreign central bank, you can temporarily swap currency on your own balance sheet with dollars on the Fed's balance sheet. You can then-- as the foreign central bank, if you need to-- temporarily swap those dollars or lend those dollars to commercial banks that are in trouble, in your own country.

So the Fed has now done this at scale twice, once after Two Thousand and Eight and once again in Twenty Twenty. So it's very clear to any global actor that this is what the Fed does, that the Fed will protect offshore dollars. No other country has anything close. We're sitting with Aditi, who knows more about this than I do. But no other country has anything close to that promise and that consistent record of without strings, without any political considerations, if you are a trustworthy central bank with a well-regulated banking system, you may have this liquidity. We will do it for you. And they do that to protect the global dollar system.

Now I think say they do that because if the global dollar system were to blow up, then it would be bad for America as well. I can see the logic in that. But yes, the Fed-- to me that doesn't look like we're sovereign over money. That looks like people abroad made up money, and now all of a sudden, we're in trouble because there's so much of it. We're getting dragged into their business. We have to be the lender of last resort.

MARK BLYTH: So this is the argument that people like Hardy and Maxfield have made about the external balance sheet and the net international investment position being a problem. So if the United States, as it is now, essentially owes foreigners more money than it's getting in from foreigners, then ultimately the United States is on the hook for that system.

But at the same time, the other way is to flip that around and say, well, it's a good system to be on the hook for because it's pretty costless to do this. The swaps don't get cashed in. And ultimately, you're the one that creams most of the benefits from the system. So it's a pretty good win-win situation, isn't it?

BRENDAN GREELEY: But who gets the benefits is the question. So there's this issue of-- I think we have Dutch disease in America. So in the '60s, the Netherlands discovered natural gas. One of the things that happened is they began exporting natural gas, drives up the value of the guilder. It destroys domestic production and creates inflation. So all of a sudden, very quickly, the Dutch discover what should have been a benefit has killed their domestic exporting industries.

So I think America has that now except what we export is not natural gas, but dollars. It's very easy to create new dollars, for the federal government to do it. And I think when you look at what has happened since it's become clear in the Nineteen Eighties that we can issue as many treasuries as we want, is that you get all the consequences that you get with Dutch disease. You get a--

MARK BLYTH: Higher exchange rate.

BRENDAN GREELEY: You get a breakdown in governance. You get a higher exchange-- so the dollar is way more valuable than it should be. It becomes hard to export. But also, you get-- it's tempting when you have all of this. When you have a commodity that you can export at will, you get a breakdown in governance if you aren't careful because you can just buy off your elites.

And what happens is we've seen this in oil-exporting economies. The whole game becomes elites fighting over who controls the tap and who gets the benefits of the money. And when I look at Washington, DC, what I see is elites fighting over who can get something out of this seemingly infinite ability to create new money. Instead of making hard choices, we just buy off elites with tax cuts, very easy to do.

We used to have to think about how to finance wars. It's a long literature on how we financed World War II and World War I. And by the time of the Gulf War, there's no question. We just issued more treasuries because that's the thing that we can do. That should be a conversation we have about how to pay for wars, and we just don't have those conversations anymore.

MARK BLYTH: So in other words, central bank independence has ended in this conversation, and America is a frontier state.

BRENDAN GREELEY: Yeah, I think we have the resource curse.

MARK BLYTH: Awesome. Let's move on to one thing.

BRENDAN GREELEY: Well, be careful about central bank independence, but we-- I don't know. I'm not willing to go that far, but--

MARK BLYTH: I'm teasing you on both points. But apropos what you just said, stablecoins. Now, it's interesting that they're called stablecoins, not stable dollars. And coins feature in your story in the sense that people need them to clear transactions. But other than that, they're not really things. And now we have this attempt by the government to basically say, maybe we're running into the limits of how many treasuries we can issue.

Wouldn't it be nice if we had a price-insensitive set of buyers that had to buy treasuries, almost at any price, in order to issue their coins? That could be up to five trillion. Once it gets going, that's a nice little earner for the state. That's really like, this is what you would do if you've got Dutch disease, right?

BRENDAN GREELEY: Yeah, that's exactly right, and this is what we're seeing. Scott Bessent has made clear that we see stablecoins as a new market for treasuries. But I think it's really important to point out that-- so we decided that we were not going to regulate stablecoins like banks. I think that was a mistake.

Every time I hear somebody talking about stablecoin, they're like, oh, no, it's this novel thing. It's the first private money. No, my dude, you just invented banking. That's all this is. You've got runnable liabilities on one side of the balance sheet. You've got assets on the other side of the balance sheet. That's banking. I'm sorry. And so what we did was we passed a law, the GENIUS Act in America, which did not require deposit insurance and gave banking regulation back to the states. That's what we had in the 19th century.

MARK BLYTH: Yeah, exactly.

BRENDAN GREELEY: That's what we had when banks blew up--

MARK BLYTH: With a huge digital money market fund as the responsibility. So it's 19th century bank governance with a giant, runnable money market fund. And what could possibly go wrong?

BRENDAN GREELEY: But the challenge is these things work. They're basically regulatory arbitrage. Once you have to do all the things that a bank has to do to make sure its money is safe, you actually no longer have an advantage for stablecoins because they're just banks.

MARK BLYTH: So before we close out the conversation, I did mention there were two other people in the room. I'm going to turn to them now and bring them into the conversation-- first, Jamie and then Aditi.

JAMIE MARTIN: I want to ask about the sovereignty point. And particularly, I mean, you've depicted this world in which the offshore dollar phenomenon is stripping the United States of sovereignty over its own currency. And that's a compelling image. But then the Treasury can come in and just say, hey, we don't like what you're doing. We're going to cut you off from the US correspondent banking system. Any other banks that deal with the sanctioned bank, we're going to cut you off too. Isn't that a kind of an ultimate expression of sovereignty over the dollar?

BRENDAN GREELEY: Yeah. I mean, I think that's a strong argument. I think we do have control. I think I went through a period of adolescence on this idea where I was like, there's no such thing as monetary sovereignty. And I'm beginning to realize that, yes, it exists, but it's really hard. And you have to fight for it. And you're constantly losing it if you aren't paying attention.

I think we have to distinguish between control and regulation. So yes, absolutely. There are choke points for the American dollar that the Treasury controls, that the Fed controls. There's the SWIFT banking system. There's the swap lines. There is a lot of control that America has over global dollars.

What we don't have is what we think of as regulation. We've got no control of euro dollars. We've got no FDIC of euro dollars. And the FDIC doesn't just insure dollars, that actually gets all up in the bank's business looking at their balance sheet. The FDIC turned out to be a really responsible regulator in Two Thousand and Eight. Very few FDIC-insured banks even got into trouble.

And so all of this infrastructure that we built up, crisis after crisis after crisis, we don't have for euro dollars. So all we can do is choose to protect them in a crisis or not to protect them or make them unavailable to someone.

What we should be able to do, if we were truly sovereign over them, is prevent crises from happening in the first place by having bank examiners looking at balance sheets, by having mandatory deposit insurance. Although it's not mandatory in the United States, just available to everybody uses it. We should have all of that architecture that keeps banks safe before they blow up. That, to me, would be sovereignty. True sovereignty over this would be regulation and not just control.

JAMIE MARTIN: Would it be safe to say, then, that US dollar sovereignty adheres only in the ability to deny or to blockade?

BRENDAN GREELEY: I think right now, yeah.

ADITI SAHASRABUDDHE: I wanted to ask on the same point about where we go from here. So we can see that the US dollar, the Treasury, not the Fed, have these weapons. And we're in new waters when it comes to using the dollar as more than just defense. So where do you see these limits or maybe even potential expansion of US dollar sovereignty going?

BRENDAN GREELEY: So there are a couple of things I worry about. I worry about erosion of the tax base in America. One of the stories of the last 30 years is that there's been a steady decline, both in the ability of the IRS to go after people, to just make them pay their taxes, and a steady erosion in the things that we tax.

Annie Lowrey in the Atlantic had a really good piece this week where she was like, so is nobody going to pay taxes anymore? And what she's pointed out is that Democrats too are now talking about carving out certain kinds of income. And so what I worry is both the administrative ability of the IRS to just collect taxes is eroding, and our willingness to tax anyone for any reason is eroding in the framework that we've been talking about. Taxes are important because it's how the federal government clears its treasuries.

So there is a counterargument. There's the MMT argument that just says taxes are there to just soak money back up to keep inflation from happening. And if there's no inflation, then we don't need taxes. I'm sure I got that wrong, but I really think that it's to keep this system that rests on treasuries. I don't even have to like the system. It's just the one that we have. To keep it going, we need to be able to collect taxes so that we can absolutely guarantee that we can then retire those treasuries when they--

MARK BLYTH: It's still a sinking fund.

BRENDAN GREELEY: It's still a sinking fund, yes.

MARK BLYTH: At the end of the day, it's still a sinking fund. You need the credible claim that there's something at the bottom that holds this.

BRENDAN GREELEY: Absolutely. And all of this rests on bank dollars, not made-up, fiat dollars. So that, I worry about. The sovereignty question, I worry about Treasury swap lines. Because right now, the swap lines that we've relied on up until now are agreed upon in private by central bankers.

And again, this is a topic you know better than I do, but central bankers need to trust each other. And they do that through lots of exercises. They meet at the bank for international settlements. They meet every year at Jackson Hole. You can think of this as the Jackson Hole system. They get together every summer. They do fun things. They go horseback riding. They talk, and they rebuild that trust. They take a picture together in front of Mount Moran.

Aditi and I have been talking about this picture that central bankers take together every year. It's on the front page of the FT and the Wall Street Journal. I think of it as the badger pageant. I'm trying to make that happen as a phrase. But I don't know that if I were to design a system from scratch, I would say we should have a bunch of elites getting together, making promises to each other to uphold money. I'd like a better system than that, but that one seems to work.

The Treasury swap lines are directly controlled by the White House, and they seem to be offered not in general to support the dollar system writ large, but to make specific interventions for specific political reasons. And I worry that once you say dollars are not a right you have to just create and be safe so long as you're responsible with them, but they're a privilege that we give you access to if we want to, that begins to change the dollar system. And I wonder if it doesn't then begin to also erode the trust that now exists in the dollar system, that if you make a dollar and you're part of a responsible country with a responsible central bank, we will bail out the dollar.

MARK BLYTH: That sounds like three cheers for central bank independence.

BRENDAN GREELEY: Yeah, or at least three cheers for a small-c conservative view that whatever we might think about central banks, the way they work now is better than the alternative. I have ways of thinking. I mean, so one way in which I've come around is that before the last year and a half, I was really frustrated with the Fed. I think that the Fed should care more about how dollars work for normal people. It should bang heads among banks more often and make bank transfers cheap and easy. It should understand its role as also getting people into the banking system. It agonizes about people outside the banking system, but it never does anything about it.

Now, a year later, if we can just hold on to what we had before with the Fed, great. If we can just have the inadequate system that we had before, I'm way more small-c conservative than I was before. The status quo ante is the best possible outcome right now with the Fed.

MARK BLYTH: Does that suggest that the 500 years of the world's most powerful money is coming to a close?

BRENDAN GREELEY: I think it's possible that the dollar could exist without the United States. I'm not predicting the end of the United States. I'm saying that there's that old cliche that Rome ended and became a church, and England's empire collapsed and it became a bank. I think it's possible that the dollar system could survive without American intervention. I mean, I have been wondering, could European banks decide to form something like the clearinghouses that we had among major banks in cities in the United States, and agree to bail each other's dollars out? They've already got something they call a dollar on their balance sheets. They could pull that liquidity. They could decide to do that.

So I think the flexibility of the dollar system means that I don't think it's tied necessarily to America. And I think it's incumbent on America to realize that if we place too many conditions on these swap lines, we could lose the dollar system. It could run away from us.

MARK BLYTH: So we began with America stumbling into the dollar, and then we found out that the international dollar system existed a priori to Americans caring or thinking about it. And it stumbled into that. And it may be the case now that America's stumbling out of the system.

BRENDAN GREELEY: It could be. I don't want to say that we're headed for an American exit from the global dollar system. I don't see any evidence that that's where we are. I do think when we look at what the global dollar system actually is, which is banks making up their own dollars and the United States providing liquidity, I can think of other ways in which that liquidity could be provided. And if we keep putting conditions on these swap lines, eventually other countries, they're going to have to figure out how to defend themselves. If we keep questioning NATO, they may figure out how to provide liquidity to each other as well if it becomes clear that the swap lines are going to be politicized.

MARK BLYTH: And on that happy note, thinking about the future, Brendan and also Aditi and also Jamie, thank you for coming in today and discussing The Almighty Dollar: 500 Years of the World's Most Powerful Money. Go out and buy the book. It's awesome and it's got loads of funny stories in it as well, so do it.

BRENDAN GREELEY: Thank you.

ADITI SAHASRABUDDHE: Thank you.

JAMIE MARTIN: Thank you.

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MARK BLYTH: This episode was produced by Dan Richards and Juliana Merullo. I'm Mark Blyth. If you enjoyed this episode of The Rhodes Center Podcast, leave us a rating on Apple, Spotify, or wherever you listen to podcasts. It really helps others find us. And if you haven't subscribed to the show, please do that too. We'll be back soon with another episode of The Rhodes Center Podcast. Thanks for listening.

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