The Dollar’s Strange, Fragile Power

Added: 2026-05-31

[00:00:00]Hey there, listeners. Just a reminder that I'm away this week, and this episode was pre-recorded. So, if something crazy has happened in the world, don't be surprised if you don't hear it mentioned. Hang tight. I'll be back on June 1st to talk all about it.

[00:00:12]All right, here's the show.

[00:00:14]>> I can look at America and think of us as having a commodity that we sell. Our commodity happens to be safe debt.

[00:00:21]Everybody seems to want Treasuries still. And I can see how that's institutionally turned America into a place where what you really have to do is go beg for things from the sovereign.

[00:00:32]It also makes wars really easy to start in America.

[00:00:35]When we look at how there was some serious thought given into how to finance World War I, how to finance World War II. We didn't have to think about that by the time the Gulf War came. We just decided we wanted a war, and then we paid for it because we can sell as many Treasuries as we want whenever we want.

[00:01:02]>> Hello, and welcome to the Gilded Politics podcast. I'm Galen Druke. We're recording this episode on Friday, May 15th, Jerome Powell's final day as chair of the Federal Reserve. It marks the end of an 8-year run that included the COVID crash, emergency monetary rescue, the return of serious inflation, the fastest rate hikes in decades, and a long political fight over the Fed's independence. By the time you're listening to this, Powell's successor, Kevin Warsh, will be at the helm of the Fed. And that makes it a great time to ask a much [music] bigger question, which is, who really controls the US dollar, and how almighty is it? Brendan Greeley's new book, The Almighty Dollar: 500 Years of the World's Most [music] Powerful Money, argues that the dollar is older and less American than most Americans realize. [music] He challenges the idea that America created or has ever truly controlled its own money. It might sound kind of heady, but these are very live questions right now. In addition to a new Fed chair, the US is facing renewed inflation linked to the war in Iran and higher oil prices, global frustration with American power, the proliferation of alternative currencies, and a rising China that would very much like a world less dependent on US [music] money. So, today we're going to talk about all of it, and here with me to do that is Brendan Greeley himself. Welcome to the podcast, Brendan.

[00:02:21]>> Thank you. That was a magisterial intro.

[00:02:23]Well done.

[00:02:25]>> I appreciate that.

[00:02:25]>> I suddenly feel relevant as a historian.

[00:02:28]That's amazing.

[00:02:29]>> Props to you. This is a good moment to publish a heady book about the role of the US dollar. And we are, like I mentioned, going to get into those 500 years of history, but I do want to start with today. Fundamental question, how do you think of the state of the dollar that Kevin Warsh is, {quote} {unquote}, inheriting?

[00:02:49]>> Yeah, it's funny. I you know, we finished this book in January, and for the past 4 months I've just been thinking, man, I hope the dollar survives until May 19th.

[00:02:59]I think I think the the shift from Jay Powell to Kevin Warsh at the Fed actually marks a regime change in monetary policy in a way that I don't think we've seen in a very long time, possibly since Alan Greenspan finished. So, the good thing about Kevin Warsh from the perspective of the Fed is that he is a company man. He's served as a governor before. Interestingly, you know, Donald Trump seems to be able to do whatever he wants with administrative picks. That's not true with the Fed.

[00:03:28]Senate Republicans, uniquely for the Fed, discourage him from nominating jokers. And when you look at the the Trump nominees for the Fed, they are all well-qualified, thoughtful, institutional people at the Fed. Chris Waller, Mickey Bowman Chris Waller was ahead of research at the St. Louis Fed.

[00:03:49]Mickey Bowman is an experienced state banking regulator, worked at a community bank before becoming a regulator. These are serious people and Kevin Warsh is also a serious person. So, I don't think we're going to see any kind of sort of wholesale dodge type destruction >> Wait, can I actually step in for just a second and ask maybe more of a political question. This is generally a politics podcast, but why do you think that is?

[00:04:13]Why does either Trump have more discipline or Senate Republicans have more of a willingness to discipline Trump when it comes to the Fed bank?

[00:04:24]>> I don't think it's coming from Trump. It seems pretty clear that it's coming from Senate Republicans and I'm guessing it's because that's where we keep the money.

[00:04:30]You know, when we look at who Trump nominated or sorry, considered nominating for the Fed in his first term, was like Judy Shelton, Herman Cain. Judy Shelton has a history as as an economist, but is is also a gold bug and seemed to change her expectations for inflation depending on who was in office. Herman Cain, I don't think was a serious choice, although he was a serious businessman. And every time he floated these ideas, it was made clear to him in various ways these were not options for the Fed. And instead, he nominated again, pretty standard Republicans for the Fed. These are These are nominations that you would expect under any other Republican president. I think there's an understanding in the Senate Banking Committee that the Federal Reserve is too important to mess around with. And they seem to be holding the line on that.

[00:05:19]>> This actually >> gets to the heart of what you talk about in your book, which is that is it that in order for the United States to sort of remain powerful, maintain its influence, that it needs to have a strong independent Federal Reserve?

[00:05:36]>> Mhm.

[00:05:37]>> Or because of the role that the dollar plays in the world, Senate Republicans, politicians from across the political spectrum, Donald Trump himself, have no choice but to acquiesce to the demands of the global reserve currency, which is to say, is it America that's in power, or is it sort of the dollar that's in power, and we just kind of have to go along for the ride?

[00:06:01]>> It's a really interesting question. It's a really interesting question right now, because I've been spending the last week reading old Kevin Warsh speeches. It's really relevant to his plans for the Fed. It became clear at the very latest during the global financial crisis, the role that the Federal Reserve plays in supporting the global dollar. When we talk about the global dollar, it's actually really hard to explain how it functions. Mostly because we have this idea that we learn in college, if we ever take a macroeconomics class, that money comes from the Fed. The Federal Reserve has the unique ability to generate dollars. I mean, those dollars then sort of flood into American banks, and then American banks do, uh, you know, transform them into into loans.

[00:06:42]That's not really how it works. That's a simplification, and it's a it was a useful simplification for macroeconomists and for the Fed. And the problem with simplifications is that eventually things change, and they're no longer useful. So, the way I explain, the way I think about the global dollar system, is that the dollar is flexible, and Americans are actually, we seem to be okay with letting other people create copies of the dollar. So, domestically, the way dollars are created is when a bank makes a loan, it makes a brand new dollar. It does not get those dollars from the Fed. It does not, you know, nobody shows up at the bank with a briefcase full of $100 bills. The bank marks up your deposit, uh, with brand new dollars.

[00:07:19]That's That's how money is created.

[00:07:21]That's how it's created abroad as well.

[00:07:23]So, other banks, commercial banks in other countries, make brand new loans, and they mark up their deposit accounts with brand new dollars. They do it the same way that American commercial banks do it. They don't need the permission of the Federal Reserve to do that. They don't need the permission of the Treasury to do that. We call those offshore dollars eurodollars for a really complicated historical reason that's not worth getting into, but they have nothing to do with the euro. What that basically means is it was a dollar created by a bank in Europe. So, that system is massive. When we look at the scale of of offshore dollars, of euro dollars. These are again dollars created through loans made by commercial banks in other countries. There according to the BIS, the Bank for International Settlements, there are about 14 trillion of them right now in the world. To give you a sense of scale, there are only 19 trillion dollars total in the United States created by commercial banks and the Fed together. Uh you know, so 40% of the dollars in the world are created offshore, are created outside of our domestic system, outside of American regulation, outside of American bank examining, outside of sort of the permission structure of the Fed or state or federal regulators. So, what became clear during the global financial crisis is that not only are the all of these offshore dollars kind of useful to America in the way uh that if we think the dollar is strong, they're a useful way to keep the dollar strong.

[00:08:41]They're also vulnerable, and when they're vulnerable, only one institution can bail them out, which is the Fed. So, in 2008, the Fed offered short-term loans, we call these swaps, to other central banks. Those other central banks in turn offered short-term loans to their own commercial banks. All of this came from the Feds. The Fed did this in 2008. They did it again in 2020 uh during the COVID crisis. So, that to me, to answer your question, feels like this system is useful to America, but the Fed's getting dragged abroad. The Fed is not generating these dollars. We're discovering these dollars abroad and then making a political decision we have to rescue them in a crisis because if the global dollar system collapses, that's also bad for America. This system grew slowly in the '50s and '60s and '70s, and it grew outside of the knowledge even of American regulators.

[00:09:30]Uh you know, there's this hilarious record of the Federal Reserve sending economists to the City of London to try and figure this system out. And and the economists come back and they write these reports. They're like, you will not believe what's happening. They're just creating their own dollars over there. And so, this system is so hard to explain because it does not fit within the structure of what we are taught, which is that the Fed is the origin of all American dollars. The banks then use those dollars and they then multiply those dollars through fractional reserve banking and then they become the dollars we use. So, I think it's important that you have to start when explaining the dollar with the role that private banks play in creating almost all the dollars that we use. And when you realize that there's this constant historical process of private banks here and abroad creating their own brand new dollars and then regulators scrambling to catch up, the story to me starts to feel less sovereign. And it feels more like there's this constant process of invention through which people create their own dollars, then regulators have to notice it, then we have to decide as a democracy, are we going to worry about these dollars? And then we have to decide what kind of regulation we're going to use to control these dollars and make sure they don't blow up. What usually happens is Morgan Ricks, uh he's a professor, he was at the Treasury, he's a professor at Vanderbilt now. He's written this great book called The Money Problem, which is basically bankers invent new kinds of dollars and then they say this isn't really a dollar, so you can't regulate it. And then the new kind of dollar blows up and then we have to jump in and regulate it.

[00:10:52]And I think we've seen that process with Eurodollars. They're created abroad.

[00:10:57]We don't really have regulatory control, but the Fed has decided that it is obliged to step in and protect these dollars. And I think there's a there's a risk right now with uh crypto as well.

[00:11:06]One of the things that we've done for stablecoins, which are supposed to be dollars, they're backed, you know, they're supposed to be backed by Treasuries and redeemable at one-to-one to a US dollar. We move them outside of the traditional regulatory regime of banks. We sort of gave them their own set of laws. That worries me because to me it means there's this new idea of what money could be. It sits outside of this old regulatory regime. When it blows up, we're going to have to recognize that these things are dollars, and and bail them out, I suspect. To your question about Kevin Warsh and what this means right now, his ascendancy to to to the Federal Reserve, to the chair position, is that he has started to make clear in speeches and in answers to Congress that he's not sure that these swap lines, you know, what the Fed does when it offers these short-term loans to other countries' central banks and then in turn their commercial banks, he's not sure that these swap lines should be immune from political control from the White House and the Treasury.

[00:12:03]So, the Fed in the past has just done this. They do this without any strings attached. They basically say, "Are you a responsible foreign central bank? If so, you can have the dollar swap." They're just protecting the dollar system, zero strings attached. It's possible that we could decide in the future, since this is a really important lever of control, that maybe there are political strings attached. And in answers to Democrats in Congress during his nomination hearings, Warsh made clear that he's not sure that these swap lines should be completely independent of control from the Treasury and the White House and Congress. And that that's a change. That's a massive change. And I think the swap lines are the most important thing that nobody's ever heard of.

[00:12:42]And quietly, Warsh is making clear that there may be a change in regime, and European central bankers are recognizing this. And they're sort of having discussions privately about, you know, what do they do if these swap lines go away?

[00:12:54]>> This is probably a lot of new information for folks. So, I want to try to make it feel concrete with all simplified question. How strong is the US dollar today?

[00:13:04]>> I think of three pillars to the global dollar system. One of them are these swap lines. Until a year ago, they weren't really in question. So, there's now a question mark. They aren't collapsing, but I think there's a question mark where there was not one before. I think the reliability of US bank regulation is another one. You know, the process through which we've had banks producing our money in America since 1789. The Constitution got the states out of the business of producing their own money.

[00:13:31]And what states did was that they turned around and they sort of charted their own banks to create new money instead.

[00:13:36]So, financial crisis after financial crisis after financial crisis. Over the course of the 19th century, banks failed all the time. You know, we've sort of gotten used to the idea that a bank crisis is an exception. But in the 19th century, early 20th century, we had them in 1819, 1837, 1857, 1873, 1897, 1907, 1932. And sort of individually banks failed all the time even between those crises. So, after every crisis there's this regulatory response. That ends up with the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation. All of these organs together make sure that when you have a bank dollar, that bank dollar will always be worth the same amount. Your bank Your bank is never going to fail and make your dollars fail with it. Okay. So, that's the second leg in this stool. I don't think that's really being called into question.

[00:14:24]I I worry that stable coins are outside of that. I'm confident that if stable coins fail, I think eventually they will, the Fed will be able to rescue them and will bring them into sort of tighter regulation. So, I'm not questioning that leg of the stool.

[00:14:36]The third one is so hard to define and it's just institutional. Do people believe that America will be able to continue to tax in order to pay off its treasuries on time with bank dollars?

[00:14:48]You know, do people trust the institutions of America? I think those have been called into question.

[00:14:54]They don't seem to have called the value of US Treasuries into question. So, if we were to actually ask financial markets, I don't see a flight away from Treasuries. It is, however, true that in recent moments of panic, we all haven't always seen the same flight into American dollars for safety that we have in the past. So, if we look at those three stools of the strength of the American dollar, I don't think regulation is yet really in question. I think the swap lines are slightly in question. And I think the broader, hard-to-define story of American institutional strength is slightly under question.

[00:15:28]>> The strength of America's institutions, in particular the independence of the Fed, was a defining feature of Jerome Powell's tenure. And I think when people assess his tenure, there's maybe two ways that you can look at it. His critics would say that he badly misread inflation and then to had to clean up his own mistakes. And I would say that his defenders would suggest that he's, you know, helped preserve Fed independence and came pretty close to engineering a soft landing before crises multiple times.

[00:16:02]Where do you land and why?

[00:16:04]>> I think we overestimate how much >> That's the end of today's preview. Head over to gdpolitics.com to become a paid subscriber and catch the full episode.

[00:16:13]Brendan and I chatted for about an hour.

[00:16:15]We dug into the idea of Fed independence and whether the Fed should acknowledge and embrace the fact that it is political. We also talked about whether the US dollar will remain dominant and who benefits from its dominance. Plus, if crypto is really anything new and what risks Brendan worries about going forward. Paid subscribers get about twice the number of episodes, can join in the paid subscriber chat, and ensure that we can keep making an independent podcast that prioritizes curiosity, rigor, and a sense of humor. When you become a paid subscriber, you can connect your account to wherever you listen to podcasts, so you'll never miss an episode. There's a link in the show notes explaining how. Again, head over to gdpolitics.com.

[00:16:54]See you there.