Will the U.S. Dollar Survive the Breakdown of the International System? | Paul Blustein
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What's up, everybody? My name is Demetri Grafinis, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest on this episode of Hidden Forces is financial journalist and economic historian Paul Blustein.

Paul has written about economic issues for more than 40 years, first as a reporter at leading news organizations like The Wall Street Journal and The Washington Post, and later as the author of several critically acclaimed books, including a history of the 2001 Argentine debt crisis that I have often referenced on this podcast.

His latest book, King Dollar, traces how the U.S. dollar became the de facto currency for global trade, savings, and investment, and examines what recent policy shifts in Washington and how they have been perceived abroad may mean for the future value and status of the greenback.

Paul and I spend the first hour of our conversation exploring the story of the dollar's evolution from its role as a second class unit of account within its own hemisphere to becoming the most important and preeminent currency in all of human history.

The second hour builds on that foundation as we speculate about what the future holds for dollar hegemony in a world characterized by growing trade protectionism, a breakdown in international cooperation, and a potentially irreparable loss of confidence among foreign investors in U.S. leadership and in the strength and reliability of U.S. capital markets.

This could not be a timelier conversation about a subject whose ramifications will continue to play out over many years, if not decades, to come.

If you want access to all of it and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io slash subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

And with that, please enjoy this extraordinarily timely and illuminating conversation with my guest, Paul Bluestein. Paul Bluestein, welcome to Hidden Forces. Pleasure to be with you. Paul, this conversation is 14 years in the making because that's about the amount of time, just short by a few days, I think, that you and I have been corresponding. I initially reached out to you

during the Fukushima Daiichi nuclear facility disaster. And I didn't know you were living in Japan at the time, but I had read and the money kept rolling in and out years earlier. This is of course a famous book you've written about the Argentine debt crisis in 2001, which was at the time and may still be the largest debt default in history, I don't know. And you had told me you hadn't read anything on Argentina in a long time. And so you thought it'd be better to introduce me to Desmond Lackman, who was deputy

director at the IMF, and later at Salomon Smith Barney during the time of the collapse of the Argentine economy and the default on its sovereign debt, which I believe was about $100 billion or so, or just under at the time. We continued to correspond in the years afterwards, but there was really no opportunity to talk about Argentina, and that was the reason I'd reached out to you.

And again, this is a book I've mentioned many times on the podcast before, and we recently did a few episodes in Argentina. And of course, that book always factors into my understanding of the history of that country's economy.

in the last 100 years. Yeah, absolutely. And I know that that's a role that you've played for other people as well. I heard another podcast recently you did with the Mercatus Institute, David Beckworth, and he said the same thing. And I was like, "Wow, man, that's wild." David and I had the same experience where you had this impact on us years ago. And I always love having people on the show who have impacted me or whose work has impacted me

in the past, especially when I was younger. Because when you're younger, it's like whatever you read, it's revelatory. So before we get into the conversation we're going to get into today about the dollar and your book, King Dollar, which is about the preeminent role played by the US dollar in the world, its history and its future.

I'd love to learn a little bit more about you and your own career and your progression. You've written for the Wall Street Journal and the Washington Post and a lot of other publications. You've authored so many books. So tell me a little bit about you and how did you get your start? What's your story?

Well, I went to the University of Wisconsin. I'm not from Wisconsin, but I was a pretty decent student there. And I then went off to Oxford University, where I did a degree called Philosophy, Politics, and Economics. And the way they teach economics at Oxford, it's extremely theoretical and highfalutin. And they don't really talk about stocks and bonds. They talk about equity and debt. And

And when I finished there, I was thinking, you know, well, what do I want to do? Well, all my friends were going to law school. And I thought, well, I probably shouldn't do that. If everybody else is doing it, there might be a glut in the law business. And

And so I decided to try my hand at journalism. And my dreams of being the next Woodward and Bernstein were kind of thwarted because everyone wanted to do that if this was in the mid-70s. But because I studied economics, I was able to get a job at Forbes magazine. They hired me under the illusion that having studied economics at Oxford, I might know something about how the economy and companies actually worked.

Anyway, from there, I went to the Wall Street Journal and began to put some of my economics training to some practice because I was covering the Federal Reserve and the federal budget, and then moved from there to the Washington Post in the late '80s. That's my hometown paper. Just continued covering economics. I found it to be really rewarding. I didn't have quite the glamorous image that the White House reporters or the style section party reporters had, but I

I enjoyed doing it. I enjoy writing about stuff that people know is important, but don't quite grasp intuitively. And so I was very gratified to hear what you said about how my book influenced you. There's nothing I like better than hearing

from professors or students, because my books are used in a number of university courses. I've been able to go on the internet and find them, you know, the syllabi on the internet. And there's nothing I like better than hearing from professors or students that, oh, you know, Blustein's books were really popular with the students. They hated the textbook, but, you know, those books brought these subjects alive and really helped people understand this concept

Well, these hidden forces, to coin a phrase.

Indeed, yes, the hidden forces. So what excites you about the subject of money and finance? I know that you were interested in journalism primarily, and so you conveniently went into money and finance because you had this degree from Oxford in philosophy, politics, and economy, which by the way sounds super fascinating. I mean, so much of the way that we think about economics today has been built around these almost like Newtonian models, or at least that's how I learned it.

Samuelsonian economics. We didn't really learn political economy. We didn't study history in school, at least I didn't. So that sounds very fascinating. But you got into money and finance and you said you found economy fascinating. So what was it that attracted you to this subject? Well, that's a good question. I mean, what's not to be fascinated and excited about? I suppose the more I got into it, the more

crazy stuff was happening. I think particularly when I did my first book, my first book was about the Asian financial crisis in the late 1990s. The crisis that hit Korea, Thailand, well, first Thailand, then

Indonesia, Korea, and then later Russia and Brazil. And looking back on that now, from the perspective that we have today, where we've already been through the global financial crisis of 2008 and COVID and all these other things that have happened. But that crisis really brought the world pretty close to the precipice. And I guess the transformative moment for me, I remember going to interview a guy at the IMF. His name was

His name is Jack Borman. He's sadly no longer with us. He was sort of the top, top ranking Michael civil servant at the IMF, not, not the managing director and deputy managing director, but the really top guy on the staff. And he had never been very forthcoming in interviews. He was very, I mean, as people at the IMF are very guarded and,

And I asked him, "How did you know that Korea was really in trouble?" And he said, "Oh my God, let me tell you. I was at my house, our beach house in Rehoboth Beach, Delaware, and we were expecting 24 people for Thanksgiving dinner.

And this phone call came from our mission in Seoul saying, you know, the Koreans are almost bankrupt. They're almost out of money, out of hard currency. Now, you know, we can get into the definition and explanation of what that is. And I had to spend all day, this guy was telling me, he had to spend all day on a conference call trying to figure out what the heck the IMF ought to do to rescue this, what was then the 11th largest economy in the world from a default, which could have

could really have sent the world into a quite dire situation. And then he said, and by the time I got downstairs, all the dishes had been cleared away and the guests had gone. And I sat there and I said, wow. So Mr. Borman, I mean, are there like a whole bunch of other stories like that? And he said, oh yeah, let me tell you.

Oh, you got to interview Wanda Tseng. You got to go interview Hubert Nice. And he gave me all these names of people who worked on the staff. And I said, gee, and I was walking back to the newsroom, to the Washington Post from that interview. And I thought to myself, hey, there could be a pretty good book here. This is really quite a, man, I mean, this could be quite a yarn, right?

So, yeah, I've sort of been able to put books together as bad things have happened. There was that crisis. There was the Argentine crisis that you caught, you know, the book I did on that. The collapse of the world trade negotiations a few years later and the Euro crisis would happen with Greece and Ireland and so forth. So, yeah, I just found it endlessly interesting.

I hate to say that I- Enjoyed it. Clap my hands and yeah, you feel sorry for the people who suffer and people really do suffer. But you just have to hope that by writing about it and informing the public debate about these things, that those things won't happen quite as often. That's kind of the difficult line we walk, right? I mean, we live in this world. We don't want things to go haywire. At the same time, when things go haywire, it gives us something to write about, to think about, to talk about.

And that's sort of our job. So I understand that feeling. So you mentioned that the South Koreans, who were at the time the 11th largest economy in the world, were out of hard currency. Of course, when we're talking about hard currency, we're really talking about primarily is dollars. And so that brings us very conveniently to the subject of your new book, King Dollar.

Let's talk about the book. So what would you say King Dollar is about? How would you describe that in other words? Why did you write it and why is the subject important in your view? Well, I got into it in, I think it was 2019, 2020. There was an awful lot of talk, partly because of the rise of cryptocurrency.

Partly because the US government was weaponizing the dollar, by which I mean it was either threatening or actually cutting off targets from access to the dollar system.

And there was a lot of talk that the dollar might be, other actors would find all kinds of new currencies to replace the dollar. And also there was a lot of, I suppose, what you'd call the usual concern that because the national debt was mounting and it's hard to see how the money supply could be kept under control, that the dollar would somehow- Lose its reserve currency status. Yeah, it would be debased. And so for all those reasons-

There was a lot of speculation about, yeah, that it would lose its reserve currency status and that it would no longer have this special, unique status that it has. And when you say reserve currency, of course, as you know from reading the book, I try to be careful in saying that that's the reserve currency, that terminology really only refers to

The dollar's special status as the currency that's held by central banks around the world in their foreign currency reserves. It has about 60% of those dollar denominated securities account for about 60%. But that's just the beginning of it. Its special status as the currency that is used in international commerce of all kinds, trade, finance, borrowing, hedging, all these ways which we can get into.

And because there was this speculation about it, and I suppose cryptocurrency may have been really the trigger that, you know, because that was really when Bitcoin and the other cryptos were starting to have one of their many heydays, which have, you know, come and gone and come back now. So I thought, you know, this is a subject I know something about because I kind of lived it.

I covered the Federal Reserve, I hate to date myself, but I covered the Federal Reserve in the late 1970s, early 80s when Paul Volcker, the towering literally because he was six foot seven, was chairman of the Fed and crushed inflation by really just putting the US economy through the ringer. I covered that.

I covered a story about how the bond market grew in the 70s. So I thought to myself, I kind of know this stuff. I don't know it all, but there's a good book here. So I'm curious, let's maybe put a pin in this, but I'd be curious if we have time to ask you about how much of...

What we know about and the stories we tell about Paul Volcker are stories that we've sort of manufactured over the years to create him into a mythic figure and how accurate and reflective those are of the man at the time. But let's put a pin in that.

What I would want to do is actually start by building a foundation and spending some time going through the story of the dollar's early years, its inception and development for being a unit of account set by the US Mint to an obligation of the US Central Bank to its ascendancy as the world's default international currency. If you approached a member of the Continental Congress or a merchant or shopkeeper in Philadelphia in the late 1700s and asked him, "What is a dollar?"

What is the answer that you would have gotten? Good question. Gosh. I mean, at that time, it was a pretty decentralized system. First, he'd probably ask you if you were talking about US dollars or Spanish dollars. Well, yes. I'm not sure. But I guess what you're getting at is the fact that dollars were then just things that were issued by banks. And of course, there were coins issued.

of gold and silver that were issued by the government. There were continentals that were issued by the revolutionary government. Where we got the phrase, not worth a continental. Exactly. And there've been so many of them printed that they didn't hold their value. Is it fair to say that it was primarily a denomination? It was a unit of account. It was a relationship between gold and

and what the paper money would be, but all the paper monies were issued obviously by different banks because these were privately issued notes. Oh, yeah. I mean, those notes that were issued by banks, I mean, the banks were essentially saying, I promise to redeem, and this would be printed on the bank notes, on the bills, and

in such a bank, the classic bank of Newburgh, New York. I've Spicken Falls Bank of Michigan, I've found a bunch of names for my book, Allegheny Bank in Maryland. They would put print on their bills that they promised to redeem in specie, in precious metal, if that bill was presented to them. So in a sense, the bill was as good as gold, but

you know, traveling to those banks to redeem those notes was no small matter in those days. So as time went on, we're talking about, you know, the 19th century now, as time went on, there were questions that were logically arose, quite reasonably arose in people's minds about whether some of these banks really had the species that they claimed they had. And in any event, you didn't know how good the regulation was of those banks and whether they would be

you know, solvent enough to be able to pay their liabilities. And although some banks were very reputable and their bills circulated at close to par, meaning like, say, a $5 note would really get you $5 worth of goods at any merchant shop.

There were other notes that if you presented a $5 bill, you might only get, I don't know, four and a quarter or something worth. That's one of the most fascinating things about reading history is you get kind of deeper down to the base layer of whatever it is. Today, we conflate, we synonymize the dollar with banknotes. We assume those two things are the same thing, but they're really not. Technically, they're not. I mean, when you pull dollars out of JP Morgan, you're actually taking JP Morgan bucks.

But because of the way that the system has been centralized over the years, we've come to conflate those two. Can you tell me how that... What was the process by which that began to change and that the public began to conflate these two things such that we live in a world today where the Federal Reserve note that we have in our pocket or the money that's in our bank account is for us dollars, universal dollars, and that's how we think of it. We don't think of it as bank notes or the obligations of the bank.

Yeah, it's such a fascinating process. And it's something I really learned in the course of doing the book. It's not something I intuitively understood. And the really hugely important step was the creation of the Federal Reserve. The Federal Reserve Act signed into law in 1913 by President Woodrow Wilson.

So it wasn't until then that America had a central bank. All the major European powers, you know, Britain had the Bank of England, the French had the Bank de France, and so forth. And, you know, some great stories about how in the process of

creating this central bank, American lawmakers went over to Europe to ask for advice about how to create one. And the Europeans said, "Just do it. I mean, it's so stupid that you're now the world's biggest economy. Why don't you have it?" Didn't they send Paul Warburg over there? Wasn't he sort of the guy that led the project?

Yes, absolutely. Paul Warburg, who is really in some ways the most crucial figure, but Senator Aldrich and the other members of Congress who were eventually responsible for

for the legislation. But when you have a central bank, it's called that for a reason because when you convert what is really private money, as you call it, JP Morgan bucks, when you have money deposited at JP Morgan, it's just a liability of JP Morgan to you. Now, it's backed by law. If JP Morgan cannot make good on its obligation to you when you come to turn your deposit into paper bills,

and demand your money, then the federal regulators will descend on JP Morgan and close it. Now, JP Morgan may not be a good example because it's too big to fail, but that's another story. Right. We also, I mean, an important distinction to make, which is that we have the official regulation, which offers limited backing by the FDIC and deposit insurance. But really at this point, post 2008, there's a sense, certainly post SVB, there's a sense that the government is just going to back up everything, all the deposits.

Well, I mean, right. I guess what I would suggest is we put that aside in terms of the sort of more cosmic question you ask, which is what makes, why do we now think of a dollar as a dollar, whether it's deposited in a bank or in our wallets? And I argue in my book that it's a whole series of steps and a whole edifice and series of arrangements, all backed by laws, regulations, in which

We depend on the state to, partly it's the Federal Reserve, partly it's rule of law and the court system, which adjudicates disputes. When banks make loans, they know that the loans they hold are assets. And if the borrower doesn't repay, they could be forced into bankruptcy. That's all part of it.

The Federal Reserve's commitment to maintain the more or less stable purchasing power of dollars. All of these things are crucial in the confidence that we have as ordinary consumers or as business people or whatever people

role in the economy we're playing in believing that the dollars or the yen or the pounds or the euros, whatever, this is true for all economies, but since we're talking about the dollar, it is certainly true for the dollar. That is why we are confident that the JP Morgan bucks are

are exactly equivalent to those dollar bills that we can just pull out of our wallets. And it says Federal Reserve note at the top. And another thing that it says on it is this note is legal tender for all obligations, public and private. That's the government saying, if you pay a debt, whether it's taxes or...

debt owed under a contract using dollars and you satisfy the terms of the contract by paying in dollars, well, then a court of law will deem that contract to have been fulfilled.

Which is not true if you say, well, I'll tell you what, I'll pay you in gold or Bitcoin or something else. That's not legal tender. So this whole edifice of laws and commitments that the state makes that give us as individuals or companies or lenders or borrowers or whatever, that the money that we are transacting in is good. Yeah.

Yeah. So there are two competing histories here. One is the history of the dollar's internationalization, which we're going to talk about. But what we've been talking about so far is the history of the federalization of the dollar, which if it's not already obvious to people, this is a process that was not linear. It went through, of course, the period of Wildcat banking, which was a kind of step back from centralization after the second bank of the United States' charter expired. It wasn't renewed by Andrew Jackson. This is a famous story that I feel like people are learning about now, Nicholas Biddle, who

and all this stuff. But one of the interesting parts of this history was after the passage of the Federal Reserve Act, and it was passed in 1913 and the bank became operational in 1914, there was a process of selling regional banks into the system. I remember reading lectures that Paul Wohlberg was giving, talks. He was going out to the country and trying to convince banks to join the system. There's a whole history here. It's just absolutely fascinating.

I don't know if you know the answer to this question. I don't, which is- I don't know if I know it either. I'm asking it. Yeah, it's fine. But how long did it take for the vast majority of banks to join the Federal Reserve System? No, I don't know the answer to that question. But it was a voluntary thing. I mean, again, there was supposedly, obviously, a level of coercion as well in the sense that once the collective became large enough, you don't want to not be part of it.

But it wasn't, it was a voluntary action. I recommend people listen to my episode with Lev Menand where we discuss some of this history, as well as my episode with Perry Merling where we cover more of the internationalization of the dollar. So there was this federalization aspect, the solidification of its role, the dollar's role and its place within US borders. Because as we mentioned when we started this conversation, the Spanish dollar was the most widely used dollar in the Western hemisphere.

So, eventually the dollar became the currency as today, which we know, which is the global reserve asset, the currency that is used most widely in all private transactions. How long after the US became the world's largest economy did the US dollar overtake the Great British Pound as the preferred currency of international trade and commerce, which was for many years the role that the dollar plays today? Oh, a long time.

It's pretty clear that the US became the world's largest economy around 1870. But because the US financial system and monetary system was so de-federalized, decentralized, as you were just pointing out, the period of wildcat banking was over by 1870. But

But there was still no central bank. I mean, there was still no Federal Reserve. And so it wasn't really until, I mean, it's hard to date exactly when the dollar overtook the pound. There's a lot of scholarship that's been done by Barry Eichengreen and other economic historians. It's quite interesting. But it's pretty clear that by the 1920s, the dollar was giving the pound a good shove aside because Europe had been through...

the First World War, the US by then did have a central bank, it had the Federal Reserve, and the Federal Reserve Act gave US banks much greater liberty to have branches and subsidiaries and whatnot, not only within their own states, but outside of their own states and abroad as well. So the dollar was, the American banks were really barging into Europe by that point. But really it wasn't, of course, as we all know, that...

period of the 20s was followed by a not so good decade in which it really didn't matter whose currency was on top because so little international commerce was going on. But it was, you know, I think the point at which we can really say the dollar became the dominant global currency by international agreement was in 1944 at the Bretton Woods Conference. You know, that agreement is null and void today. It was dismantled later, but

So, as I say, go from 1870 when the US became the world's largest economy to 1944 when it was US was not only the world's largest economy by far, but clearly going to be the global hegemon following the Second World War. So, that's a long period of time, isn't it? So, what are the major pieces of physical US dollar infrastructure that we need to be aware of to understand how the system works? And can we rank them in importance?

That's an interesting question. So I'm talking about things like the Swift system, chips, Fedwire, stuff like that. Yeah. Well, I would say the aspect of the hardware or of the institutions that are least well appreciated is chips.

I write a good bit about chips in my book. The Clearinghouse Interbank Payment System. The Clearinghouse Interbank Payment System. Now, I'm not claiming any great revelations. It's not like I scooped, did some great investigative reporting and told people about some institutions. Sure, but most people don't even know what this is. They wouldn't even know the acronym. Exactly. People have heard about SWIFT and it's partly because they're familiar that when they make an international payment, they have to enter the SWIFT code.

And they know that if a country is disconnected from SWIFT, that it'll have difficulty doing international payments. Well, that's true. It'll be really inconvenient. But SWIFT is just a messaging system.

It's important, but what it does is when one bank transmits money across borders to another, it sends a message to confirm if this is what is happening. But you can do that in all kinds of ways. It used to be done by telex machine. It used to be done, and it can be done by email if necessary. I mean, I guess you would want to make sure you use a very secure email system. But SWIFT doesn't actually transmit funds, and it doesn't clear and settle funds. CHIPS

is where funds are enormous amounts of dollars that cross international borders are cleared and settled. Now, Fedwire, which also handles a tremendous amount of clearing and settling, mostly handles domestic payments. For those familiar with crypto, I don't know if this analogy will resonate with you or if it's accurate, but it seems kind of like Fedwire is the base layer

that everything reconciles to, and that chips is the secondary layer that's actually available to process the vast majority of transactions. Everything settles on Fedwire because ultimately the dollar is a liability of the US central bank. But does that resonate? Does that make sense? Well, sort of. But chips, I mean, chips is a matching system, right? So the member banks are

There's something like 40 banks, and it's a private network. It's not run by the government, right? But it's based in New York. It's subject to US law, and that's incredibly important. And it's got all the biggest US banks in it, but it also has a lot of big foreign banks in it. And this is a crucial qualifier here. It's the US subsidiaries or branches of foreign banks, and they are also subject to US law.

And so these banks are handling just gigantic amounts of money in payments to each other on a daily basis. So if JP Morgan is getting $3 billion in payments from Banco do Brazil or something like that, and if Paribas in France is getting

$2 billion from Bank of Tokyo Mitsubishi or something. So then what CHIPS does is it says, okay, well, we'll match these payments so that if Bank of Tokyo Mitsubishi is an equivalent amount to Paribas in France, well, then we'll cancel those two. But of course, those two banks don't pay the exact same amount to each other every day, but we'll match the payments. They use this very sophisticated algorithm.

to do that. But then of course, if there's some leftover, then we'll match the payments that's leftover from Banco do Bank of Tokyo, and we'll match that against the amounts that Banco do Brazil owes to JP Morgan. I mean, I'm not giving a very- There's a whole process of reconciliation. Yeah. Right. Right. That's what the algorithm does. It's very sophisticated. And what it does is it's basically canceling what one bank owes another against what the other bank owes to it,

But of course, the two banks don't owe exactly the same amount to each other on any given day. But then other banks owe amounts to the first two banks that we're talking about. So these things all get canceled out in this very sophisticated algorithm that Chips runs, and it handles...

more than 90% of the dollar payments that are made across borders. These are stupendously large amounts. Their last public disclosures were 540,000 transactions per day on average, $1.8 trillion in value. And since that's all subject to US law, the reason I'm saying, I'm emphasizing the importance of chips here and the fact that all these foreign banks that are connected to chips are

are U.S. subsidiaries also subject to U.S. law, is that this is what gives the potency to U.S. sanctions. Because what the U.S. government can say is, if you, foreign banks, anywhere in the world, if you transact with someone we don't like, someone that we've targeted, we've designated as a specially designated national, this is the term that the Treasury Department uses when it wants to sanction. If you

do business with that bad guy, then you're cut off from chips. And that means you can't conduct international business. So that's why I'm saying chips is, in my view, the most important piece of hardware. I like the way you put it. Yeah. I mean, to your point, I don't know if you mentioned this, but all data processing backup sites for chips and Fedwire are located in the US, which is what gives the US jurisdictional authority

I don't know, I don't have the analogy at top of mind, but there's something about the power of secondary sanctions.

It's almost like ethereal, like you don't want to be tainted with anything that could be remotely seen as going against US government policy. And banks are so allergic to that possibility and so risk averse that they end up just cutting off entities or cutting off countries at the merest hint. And in fact, we saw that with Russia. I think even before the private sector was way ahead of the government in applying those secondary sanctions to entities doing business with Russia, because they were worried

that if they ... It wasn't worth their time. It wasn't worth their ... It was from a risk awards standpoint, it wasn't worth it. Just get out of Russia, get out of dealing with these companies, because what if the US government decides to sanction them, et cetera? That's going to impact our business. So there's a private logic of its own that makes these sanctions and the fear of sanctions just really devastating for private entities in countries that are remotely impacted by them.

Let's shift our attention now, Paul, to what has made the dollar. So we talk about the physical infrastructure, but there are other aspects of this that are more difficult to define, some of which we've kind of talked about, which is the credibility of US leadership or the legal system and things like this, that I think you would argue have made the dollar what it is today, which is the preeminent global currency and has made it successful in the face of the end of Bretton Woods and the end of gold backing.

And I think some of the things that you focus in on the book are things like liquidity, credibility, crisis management, things like this. In chapter three of the book is organized as a sequence of stress tests and policy responses, including, as we said, the end of the Bretton Woods system of fixed exchange rates, things like the inflation spiral in the late 1970s, the super dollar cycle during the Reagan administration, and of course the great financial crisis among others.

What do these examples tell us about not just the dollar's resiliency and its source of strength, but the tests that have turned it into the currency it is today? Yeah. I think at each of those junctures, there were all these predictions that, okay, the dollar is doomed.

And, you know, one of the, I hate to say, one of the delights, I guess, but I have to admit as a writer, you have to take some delight in finding fodder that will be, you know, useful in your writing. I kept coming across these predictions that people had made and often quite distinguished economists and, you know, people who were, you know, they weren't just kooks. They were quite legitimate scholars and they had good reason.

to be making the kinds of claims that they were. At each of these stages, each of those junctures that you make, Nixon racing the last vestiges of the gold standard in 1971 and then the inflation, which was a really probably maybe the most serious threat because when you have double digit inflation and it seems to be racing out of control, why do people want to hold dollars?

And, you know, then, of course, the rise of the yen and the rise of the euro, which people, there were lots of predictions that those would supplant or at least seriously rival the dollar. And the global financial crisis, I would say, was the one, you know, there was just so much of a, all right, we're done with this system. And it was quite legitimate, the complaints about the dollar dominance at that point, because it had contributed significantly.

to the crisis. And the world had seen how dangerous it is to depend on a system in which one currency is dominant. But at each juncture, we saw the importance of the unique advantage that the US and its currency and its financial system have, which is the depth and breadth and liquidity of

of the market for US government obligations, treasury bills, treasury bonds, treasury notes, right? The US doesn't have any unique advantages in terms of rule of law. I mean, Europe has that, Japan has that. It's not the only big economy in the world. Europe is a big economy. China is a big economy. Japan is still kind of a big economy. And the fact that the dollar has been the reserve currency for so long doesn't mean that it'll stay the reserve currency for so long because after all the British pound,

was the reserve currency for a long time and it gave way to the dollar. But no currency has ever been as dominant as the dollar is today and no other currency on earth today has this feature of one type of obligation that is so deep, so liquid and with such a broad market because... And that's so crucial in a crisis.

because everyone wants to be able to, they want to have an asset that they can convert to cash in a hurry. If they can't get cash in a hurry, can't pay their obligations, they're the next Lehman Brothers. And they also want to have an asset that they don't have to sell at fire sale prices and treasury obligations because the market is so deep and broad.

And we can talk about the exceptions. There have been periods of time when the treasury market hasn't functioned so well, and we had that just a few days ago. But put that aside for a minute. I mean, that's the unique quality of the dollar. Well, that's where this whole conversation is building to. It's building to today, which is my goal is to apply this framework and this foundation to that conversation in the second hour. Is the dollar's international status in your view something that's kept alive by the inertia of network effects?

Or is it a policy that must be actively maintained by things like a credible anti-inflation policy by the Fed, a succession policy also, which is something that we'll have a chance to talk about in the second hour, the independence, in other words, the perceived independence of the Fed, a willingness to coordinate with other central banks when imbalances threaten the system, the use of things like swap lines, for example, unparalleled market liquidity, which you just got to, not just in the dollar, but also in treasuries.

and the Fed's readiness to backstop the world in extremists, which is the role it played in 2008.

Well, I mean, I guess the answer to your question is yes and yes. So yes, both the private network effects of the infrastructure and the inertia, but also the active support of the US government and wanting the dollar to play that role. In other words, if the US stepped away and changed its policies, that would have a materially detrimental impact on the dollar's viability as an international currency. Well, I mean, the US has to really step away.

because the network effects are so powerful. I mean, as you know, the sort of the underlying premise of my book is that the dollar's dominance, this special unique quality that it has in international commerce is almost impregnable, barring catastrophic missteps by the US government. And I'm of the view, I mean, okay, we'll come to the present day later in this discussion, but I'm of the view there's many catastrophic missteps

are being made, but are they catastrophic enough that the U.S. is really stepping away so badly from the pillars and the foundations of dollar dominance that it really is at risk? I don't think so. But if the Federal Reserve were to announce, or if the U.S. government were to announce, well, the Federal Reserve is not going to play the role in a global crisis that it has in the past,

We're only going to provide swap lines to countries that we like and who play ball with us and who do what the president of the United States wants. I think that would seriously undermine confidence in the dollar, no question, in its international role. For all of these kinds of dire scenarios that people can come up with of the US government really stepping away from its commitments and from providing the foundations and underpinnings

of dollar dominance. My answer always is, well, dollar dominance is important, but it's not nearly as important as avoiding these dire scenarios. I mean, just the other day in one of my presentations, someone said, well, what would it take? I mean, suppose we had an all-out war with China. I mean, after all, it was the first and second world wars that brought down the pound. And I mean, my view as well

The First and Second World Wars were a lot more important and horrible than losing the dominance of the pound to Britain. And if we have a war, that's going to be a lot more important than losing dollar dominance. I think it's also important to note that when we're talking about the role of the dollar, it's really about the role of the United States. I mean, the role of the United States, certainly after the collapse of the Soviet Union,

and then the rise of neoliberalism and the broadening of globalization has been to play the role of guarantor of the international commercial and trading system. And the question I think that a lot of investors are asking themselves today and policy makers in other countries is, is the US government intent on smashing that system?

And I think if it is, then that changes the calculus, I think, for people who in some sense might agree with you about the sources of dollar dominance. It might change the calculus that they have in their heads about the

the staying power of the dollar, because it is important for the US to actually play a certain role in maintaining that system. And if it actually seeks to try to undermine it, well, then the question becomes, how long does it take? And are we beginning to already see the backlash that is emerging from some of these policies?

Paul, I'm going to move us to the second hour where I want to wrap up this part of the conversation. I also want to talk about some other things. We've talked a little bit about crypto. I want to get a little bit more specific here. Also, there's some conversations about CBDCs and things like this. And then I really want to talk about this fear or this risk of a cascading loss of confidence in Washington and the effect that that could have on the dollar, on US treasuries, and potentially a secular move out of US capital markets by investors.

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