No One Can “Replace the Dollar”
Henry Farrell put out a great piece last week thinking through economic security policy under the incoming Trump administration. His main thesis may be less than shocking but it proves no less important for that: expect chaos.
I’m interested in the third reason he gives for why things will be much less stable under Trump 2.0 than they were under Trump 1.0:
Third - and most genuinely new - there is a faction that wasn’t important in Trump I and is very important indeed in Trump II. Crypto. Important Trumpworld people like David Sacks, the incoming “crypto czar,” and Elon Musk, were made men in the “PayPal mafia” – the quarrelsome group who founded the payments platform. And PayPal had a core goal in its early days - to displace the U.S. dollar.
As Peter Thiel later described it, their collctive ambition was “to create a new Internet currency that would replace the U.S. dollar.” All of the founders were “obsessed with creating a digital currency that would be controlled by individuals instead of governments.” Many years later, when Bitcoin came along, Sacks anticipated that it might fulfil PayPal’s “original vision to create ‘the new world currency.’” (my emphasis)
Here I only want to make one very simple but also deeply significant point: no one can choose to “replace the dollar” because dollars are not the sort of thing that can be “replaced.” Dollars are not money. No one pays for anything by handing over “a” dollar or multiple “dollars.” Indeed, there is no such thing as the dollar.
We pay for things in credits we hold on a debtor, which are themselves denominated in some money of account. But denomination is much less important than the debtor on whom we hold a claim. Denomination seems so significant to us only because the best debtors to have (the ones you most want to owe you, and we can never forget that to “have” money is to be owed by someone) tend to denominate their debts in US dollars.
But the real source of economic institutional power is not the name “dollar.” Anyone can call their debt “dollars” – see Canada and Australia and a whole host of others – and not all “dollars” are worth “a dollar.”1 And they can even call their dollar debts by a different name, say “Tethers.” The naming or the branding does not guarantee the quality of the money.
Rather, the source of stability and integrity of money, and of the institutional monetary system, is the network of creditors and debtors: the banking network. And while this institutional assemblage will ultimately be deeply entangled with sovereign governments, it is never directly and completely “controlled by governments.”
The original bitcoin dream (long ago abandoned by all but the most simple-minded bitcoin bros), which may well have earlier been the dream of the paypal mafia, that one can create some magical token of intrinsic value, and then trade it around between powerful and important people – that is a not a dream about money. That’s a magic beans story (and we know how modern versions of that end), an utterly untenable fantasy based on a fundamental misunderstanding of the nature of money. That dream will never come into being.
PayPal learned this lesson and very early on abandoned the dream; thus they succeeded as a capitalist business by becoming a new kind of payments processor.
Stablecoins have learned this lesson; hence they have succeeded wildly as shadow banks that help to arm terrorists and provide liquidity for a variety of other criminals.
And even the biggest crypto believers now understand this quite deeply on some levels, which is why they are feebly trying to insist that US federal regulators be required to provide banking services to the crypto “industry.”2 Indeed, they are spinning a nonsense narrative that when banks rightly worry about getting into business with criminals, or even just with crypto businesses whose only chance of success depends on the better-fools business plan, those banks are actually “discriminating” against the crypto “industry.”
The takeaway point here is just a proper mash-up of A. Mitchell Innes and Hyman Minsky: no one can “replace” the dollar because anyone can issue their own dollar.
The dollar is not “a” singular money, but rather – as Henry and his co-author Abe Newman insightfully show in their award-winning book – an entire international system. It’s easy to assume that we know what came before the current system – in which the US dollar putatively functions as the international “reserve currency.” We think that before dollars we had gold – an actual singular entity of intrinsic value, that was then replaced by mere “fiat” money, the artificial contrivance of an untrustable government.
No.
Before the dollar there was the pound. Gold was never money even when there was an international norm of making domestic currencies “convertible” to gold. Rather, there was a system of credit/debt (i.e., a money system3) that was linked up with the idea of gold as an asset on the balance sheet of banks. But in the age when the gold-standard ruled, GBP was in fact the international reserve currency. To have the best money then, one wanted to hold deposit accounts on banks in the City of London, or to hold Gilts (UK treasury bonds), just as today one wants deposit accounts on US commercial banks in New York, or US Treasuries.
Is it possible that one day in the future “the dollar” will no longer be the international reserve currency? Of course it is! Nevertheless, how we get from here to there can neither be programmed nor easily predicted. What I can tell you is this: the “thing” that will replace the dollar will not be a thing; it will be a new form of credit/debt relation. There will be different and new institutions (they will be banks, even if they are not called banks) that issue their own tokens of debt. Powerful corporations, individuals, and even nation-states will always want to hold HQLA (high-quality liquid assets), and what counts as HQLA can and will change. But this will not occur because of the willful choice of a handful of (even quite powerful) individuals, not only because the global money system proves far more complicated than that, but also because the very nature of money prevents it.
Innes was the first writer on money to bring this point home with full force, when he merely documented the way in which early twentieth-century banking practices meant that some dollars are worth 90 cents and some might even be worth 105 cents. This is clear in the money markets today if one merely looks directly at them. For example, aside from their initial issuance, bonds rarely sell at par. To read a bond price list (i.e., a list of broker/dealer ask prices for bonds) is to see a bunch of “dollars” (i.e., credit/debt denominated in USD) that are worth more or less than a dollar.
There ought to be a rule that this always be written in scare quotes.
That’s what money is: a credit/debt relation, itself dependent on larger institutional structures, cultural norms, and socio-political relations. Here I paraphrase Geoff Ingham, who once said to me: “from now on I shall refer to money only in the following way: ‘money (credit-debt).” I take his point to be that the danger of writing “money” alone is that we reify the money-thing in the way Keynes long ago warned against, yet if we try to remove all reference to money as thing (by just writing “credit-debt”) we run the risk of missing the actual fetish-character of money. Here I mean missing an actual fact about money, that it has this fetish-character (in that the money relation always gets identified, positioned, and treated as a money-thing).