Paul Blustein on the Rise, Dominance, and Current Challenges to King Dollar

Paul Blustein is a former Washington Post and Wall Street Journal journalist who has authored several acclaimed books on global economic institutions. In Paul’s first appearance on the show, he discusses the historical rise of the dollar, it’s present-day power, how it compares to other global currencies, current challenges to its power, the rise of crypto, and much more. 

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This episode was recorded on March 26th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Welcome to Macro Musings where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us. 

Our guest today is Paul Blustein. Paul is a former Washington Post and Wall Street Journal journalist and author of several acclaimed books on global economic institutions. Paul has a new book titled King Dollar where he explores the dollar’s historical rise, its present-day power, and the challenges to its dominance. He joins us today to discuss his new book and recent developments surrounding the global dollar system. Paul, welcome to the show.

Paul Blustein: My pleasure.

Paul’s Books

Beckworth: It’s great to have you on, and it’s very special for me to have you as the guest today because you play an important part of me being here in this studio. When I was wrapping up graduate school, I was reading a book of yours called The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF. And you covered the Asian financial crisis, the late ’90s, lots of great stories, lots of good international economics in here. I was immersed in this. It really broadened my thinking.

As you may know, in grad school, you do a lot of applied math and economics. You aren’t necessarily so informed on policy issues, real-world developments. I had read this. I had read some other stuff like The Economist magazine, but your book in particular is very useful because when I applied to the US Department of Treasury right out of grad school, they asked me a series of questions that I could not have answered had I not read your book.

Blustein: Glad to have been of service.

Beckworth: No, I feel, in all sincerity, that this book put me on a trajectory. It was a pivotal piece of my journey to get into Treasury. Once I got into Treasury, John Taylor hired me. I met people. Opportunities opened up that probably wouldn’t have otherwise. Thank you for writing The Chastening and helping me get on the path I am, that we are here today in the studio.

Blustein: I’m delighted for the Treasury’s sake too; that it was their gain as well. And that you have this fantastic podcast that I’ve learned a great deal from. I’ve listened to a number of episodes.

Beckworth: Oh, great.

Blustein: You’ve helped me a lot on my current book project.

Beckworth: Fantastic. It comes full circle. I read your book, you’re here today, and I have to add one other bit of history about your books. I also really enjoyed And the Money Kept Rolling In (and Out). This is the story of Argentina, its story of the currency board, it’s debt default, and what happened afterwards. I happened to go to Treasury 2003, 2004, and I was in the Office of Western Hemisphere Affairs, so we were working on the fallout, what happened afterwards.

I had a colleague who was the Argentina desk officer, he sat right next to me, I’d help him out sometimes. At that very time, John Taylor was the undersecretary, Randy Quarles was the deputy, I think, assistant secretary for International Affairs, and they were working on this issue: How do we resolve this debt issue that was going on with Argentina? This is very real to me. Also, when I went from Treasury and I started teaching. I was at a university. I assigned this book many times to my international economics class. They loved the book. They weren’t as excited about the textbook, but they loved your book.

Blustein: I love hearing that from professors, that my book helped—the spoonful of sugar helps the medicine go down kind of thing. I have to say, I do hear that a lot. None of my books have ever made the New York Times bestseller list because they’re about these, you might say, niche subjects in international economics, but it makes it all worthwhile when I hear from professors or students that the book helped them grasp all these complexities by using stories.

I’m a journalist. I studied a fair amount of economics at the undergraduate level, but did not go as far as you did in graduate school. I think I know more than enough—they say if you know just a little, you may be dangerous. I think I know enough not to be dangerous—

Beckworth: Oh, totally.

Blustein: —but not so much. I approach these things very much as a journalist.

Beckworth: Your book in Argentina that I just mentioned, it was very useful to illustrate a number of ideas like the macroeconomic trilemma we teach in international economics. The story of Argentina illustrates that very well during this time. The personalities, though, bring the story to life. You do a great job on that. The Chastening, I remember reading this, and there’s a lot about what’s happening in Treasury as well as the IMF.

Well, guess what? I go work in that very building, and as I’m walking through the halls, as I’m visiting the IMF—we review IMF programs, part of our job at Treasury—it’s like, “Wow, this is what Paul was writing about.” I got to live out what I had read in the book. So it was super fascinating, super helpful as a professor of economics, too, when I’m teaching.

Motivations for King Dollar

Today we’re here to talk about your new book, King Dollar. The full title is The Past and Future of the World’s Dominant Currency. And I would say great timing. A lot is happening right now. We’re going to talk about it. The Mar-a-Lago Accord, certain other developments we’ll get to later in the show, but man, what great timing. What motivated you to write it? Why now?

Blustein: About five years ago when I started working on it, there were all kinds of things happening then that were raising questions about whether the dollar would remain and maintain its special unique status as the dominant currency. Maybe one of the big things then was China had their central bank digital currency coming out, and there was just a tremendous amount of angst about if we don’t match China’s CBDC with our own CBDC, basically, we all may as well just go to the beach and live off our savings because we’re going to be toast.

China’s CBDC is going to be so convenient and so fast and so whizzy that Americans will be going around with the E-Yuan in their phones, and they unwittingly will be transmitting all this data back to the Chinese Communist Party. If we don’t match that with our own CBDC, the dollar is doomed. Of course, I’m exaggerating a bit, but not that much. That was one.

There had been a lot of talk that because the Trump administration had used sanctions really to a fare thee well—the first Trump administration, and even before Trump was president, there had been warnings that by weaponizing the dollar, by depriving targets of access to the dollar system, that we would encourage countries to find other means of transmitting value and using other currencies. When Trump used sanctions really in a very coercive way in the dispute over Iran in 2018, really bullying the Europeans into going along, threatening them with sanctions, that really amplified a lot of that concern.

Actually, at that time, I was thinking there’s a certain poetic justice to the argument that if we overuse sanctions, that we’ll lose this dominance that has a lot of benefits, and it would be a good subject for a book. I should probably express gratitude to the Smith Richardson Foundation. It’s a foundation in Westport, Connecticut that funds a lot of really good work on national security issues and economic issues. They said, “Yes, we think that’s a worthwhile topic,” and they funded my work. I’ve learned a tremendous amount doing it. As I say, I think I went in with a pretty open mind and came to the conclusions that I did.

Beckworth: I’m glad you wrote the book because this is a topic that seems to come up every few years. I remember back in the early to mid-2000s, it was the end of the dollar, big worry about the current account deficit. We’ll talk about that probably a little bit later. Recently, right after Covid and the massive amount of fiscal stimulus, inflation, and the Financial Times seem to have an article every other week on the dollar’s demise. In between, there’s been many other times where the dollar is going down, the euro is going to take over, or the yuan is going to take over. All these stories haven’t happened yet.

Now, we shouldn’t take it for granted. We’ll talk about that as well in a minute. This is an important discussion. You do a great job outlining the history, some of the key moments. It’s a great read, again, full of stories. This is not your typical dry economic textbook. Folks out there listening, get the book, share it. If you’re a professor, definitely use it in the classroom. I’m definitely going to give this to some friends that I have because they often ask, “What do you do for a living? Exactly what’s going on?” This is a nice book that captures a lot of what I think about.

History of the Dollar 

With that said, let’s go back and talk about the history of the dollar. The title of the book is King Dollar. Clearly, listeners of the show know this already, and we know this, that this is the dominant currency in the world, the global dollar system, the reserve currency of the world, many labels you could put on it. Where did it all begin?

Blustein: The funny thing about the dollar, there are some really great histories that have been done. Barry Eichengreen’s book, Exorbitant Privilege, I think is the one that really I learned a tremendous amount from. The dollar was nowhere in the first 150 years of American history because Americans, particularly in rural parts of the country, were so, shall we say—I don’t want to use the word paranoid—but mistrustful of financial power.

As a result, America had this terribly primitive and unsophisticated financial system. Banks weren’t allowed to have branches across state lines, or maybe they weren’t even allowed to have branches at all. No central bank. There’d been this controversy in the early decades of the American republic about should the Bank of the United States exist. We all learned about this in history class. I had to relearn it again. 

Even after the U.S. surpassed Great Britain, there weren’t such great statistics then, but around 1870, as the biggest economy in the world, the British pound was still the dominant currency and remained so really until—there’s debates among economists about how long it lasted. Anyway, eventually, U.S. came around to the view, “Actually, we have this modern economy.” Andrew Jackson, with his animus toward a big U.S. financial institution: “Now that we’re a more modern economy, yes, we do need a central bank like the English have and like all the other European advanced economies have.”

In 1913, President Wilson signed the Federal Reserve Act, and then after World War II—this is a much more familiar story, I’m sure, to all your listeners, and I think a lot of what I just said is probably familiar—but the Bretton Woods Conference in 1944 which formally established the dollar as the central currency in the international monetary system. Of course, it’s not a treaty anymore that enshrines the dollar because President Nixon basically did away with the Bretton Woods system and erased the last vestiges of the dollar’s links to gold. That’s a brief, sort of capsule history that I go into.

Beckworth: We rely more on network effects, rule of law, the size of the US market now, but going back, those important developments were key. You mentioned the Federal Reserve, World War II, things that happened, but I think your book gets into other stories even before then. Again, one might be tempted to say central banking is a very boring, still discussion. No, it’s not. You mentioned Andrew Jackson, the Second Bank of the US. That was a presidential election issue. Andrew Jackson versus Nicholas Biddle, this elite eastern central banker who threw everything down, “Let’s go at it, Andrew Jackson.”

He could have waited, is my understanding, and not made this a big deal, but he made it a big deal, became an election issue. Jackson won, and then didn’t renew the charter, and the rest is history. It’s fascinating to think what would have happened if the Second Bank had stuck around, if Philadelphia would have become the financial capital versus New York City. A lot of interesting counterfactuals, and that’s just one story you talk about in your book. The Bretton Woods system, the fascinating story of John Maynard Keynes, he didn’t get what he wanted either. Bancor: I don’t know, is SDR a version of bancor, a watered-down version of it, of his vision?

Blustein: Yes, I suppose it’s a watered-down version.

Beckworth: He didn’t want the dollar to be dominant, that was for sure.

Blustein: For sure.

Nixon Shock of 1971

Beckworth: It’s so fascinating. All these interesting stories that go and tell the tale of the dollar rising to power. Now, part of the stories, and we can’t get into all of them for the sake of time, include the Nixon shock in 1971. I really like that story. Tell us a little bit more about how that unfolded. Why did Nixon take us off gold?

Blustein: Because we didn’t have enough gold to cover all the dollars that had gone overseas. When the Bretton Woods system started, it didn’t work perfectly, I know. America had, I think, 80% of the world’s gold stock in its reserves in Fort Knox. There weren’t that many dollars overseas at that time, but then the US, we had the Marshall Plan. As other advanced economies recovered, they were able to use their purchasing power to buy stuff from us. They needed dollars to buy those things, so a lot of dollars went overseas then. But then Americans began buying increasing amounts of stuff from them.

We were using dollars to pay for those things, and so more dollars were going overseas. Of course, those dollars, it’s not like they don’t sit in vaults, stacked up like bills. The foreigners convert those dollars to a lot more US Treasury-like obligations. Under the Bretton Woods system, they had the right to convert those into gold. That was the rule of the system at $35 an ounce. Increasingly as the ’50s, ’60s, and then very early ’70s developed, there were too many dollar liabilities sitting overseas compared with all of our gold stocks.

First the French began saying, “We’re going to pull our—.” They famously sent a warship to New York to take their gold back from the basement of the Federal Reserve of New York.

Beckworth: Great story.

Blustein: There was increasing speculation that the dollar peg couldn’t hold. America began running its very first trade deficits, I think, I believe 1971, when the trade balance finally went to the red. That was a clear signal that the system was not sustainable the way it was configured then. It’s funny. When Nixon decided to go off gold entirely, especially the chairman of the Federal Reserve, Arthur Burns, thought this was a terrible tragedy. Same as when Franklin Roosevelt went off gold in 1933, some of his advisers said, “This is the end of Western civilization.”

People were wringing their hands in the early ’70s about what Nixon had done, but in retrospect, it turned out to be, I think, a pretty good decision. The era of floating currencies where currencies rise and fall according to supply and demand in the huge foreign exchange markets, and turning the dollar into a pure fiat currency which is no longer backed by any hard asset, it turned out to work out quite well, I would say. It’s certainly not perfect, but it certainly was not nearly as bad as a lot of people feared.

Beckworth: Yes. It’s interesting to look back and see all the people who were worried, “This is the end of the world.” There were still people when I was in grad school talking about, “Oh, 1971.” In fact, I think the Wall Street Journal would run these anniversary commentaries whenever 20 years, 30 years afterwards, “Hey, we made the mistake in 1971.” To me, that always struck me as wrong for two reasons. First, Nixon’s going off the gold was just like sealing what had already been done. It’s like getting a divorce. Something has happened before to get to the point where you have a divorce. The divorce itself is the legal part of it. There were already problems in the system.

Secondly, like you’ve said, the system has actually held in terms of dollar dominance. Bretton Woods II, some economists famously called the system that emerged after that where we still have countries that loosely peg to the dollar. The US is still the center of global finance. With or without the gold, we were still playing a very similar role.

It was interesting in the 1970s. You have all these people who are worried about it, and you tell the story of Saudi Arabia, the Saudi Arabian Monetary Agency. I think SAMA. That’s the acronym for it. They made a deal with the US. The story I’ve often heard is the US promised military protection. You outline this. They built bases there, and that’s the reason that they went. A lot of their funds they earned from the oil and they went and bought treasuries, so the petrodollars.

You also note in your book there really wasn’t many other alternatives. They had, in some sense, to go buy treasuries because the volume was so big. The amount of funding that was coming into them, they had to recycle somewhere. Who else was providing enough volume of assets to invest in? It was the US government. I wonder if people overplay it when they say we flexed our muscles as a military power, “We’ll protect you. You come buy our securities,” versus out of economic necessity, they had to buy Treasuries.

Blustein: Absolutely. You hear this so often, and particularly you hear it from the crypto people, that the petrodollar system was this very cynical bargain between the United States and Saudi Arabia. One of the reasons they love the story that this cynical bargain was struck, where the US promised the Saudis military protection and the Saudis said, “Okay, we’ll use the dollar,” one of the reasons they love that is because bitcoin is always accused of wasting tremendous amounts of energy, electricity, because when it is “mined,” a lot of electricity is used. They say, “Oh, yes, but the dollar is based on this terrible deal that Henry Kissinger struck with King Fahd to make the dollar the dominant currency. Because of that, the world has subsisted on fossil fuels for all this time. It’s the dollar system.” They love that story.

I came across this memoir written by David Mulford, who later became undersecretary of the Treasury. At that time, he was this young investment banker in the ’70s who was sent to Saudi Arabia by his firm, White, Weld, to advise the Saudis on how to manage this huge amount of money that was pouring in because the price of oil had gone from basically $3 a barrel to about $11 a barrel after the conflict between Israel and its Arab neighbors.

I think I do a pretty good job of retelling it in the book. He describes what life was like working in the Saudi Arabian Monetary Agency, an incredibly primitive institution. I happened to have gone to Saudi Arabia around that time. It was one of my first reporting assignments. The Saudis wanted to invite some journalists to come. This was a deliberately backward country. They were very leery of modernity because of their devotion to strict Islamic beliefs. Mulford writes this really hilarious story about how they were having to communicate with the outside world using telex. They had one telex machine in the Saudi Arabian Monetary Agency which was the biggest repository of dollars in the world. Dollars flooding in.

Beckworth: It’s crazy. Right.

Blustein: It was very difficult for them, first of all, even to just communicate with anyone who might be able to sell them foreign assets that they could invest in. I think that the most important point he makes is that, first of all, the oil was priced in dollars. I’ve seen figures that at least 75% of the oil was priced in dollars at that time because the dollar had been the dominant currency ever since Bretton Woods. They had dollars, but the US Treasury market was the market that was by far the most liquid, where they could invest these huge amounts of money that they had without making the price go up or down.

All the other countries where they might have invested their money, if you invested a lot and they were getting a lot, if they invested substantial amounts, the price would go up and they’d end up taking a loss or risking taking a loss. I love this story, to be honest, partly because it rebuts the bitcoiners’ argument. I loved it for that reason. The main thing it shows is how important liquidity of the US Treasury market is in dollar dominance.

It’s a very early example of how when the dollar became this fiat currency floating up and down, according to forces of supply and demand, no more gold backing it. It still remained dominant because of the liquidity of the market for the most important asset, and certainly the most important dollar-denominated asset, US Treasury bonds. How important that is. I could explain it in a way that I think even people who have never taken an economics course could sort of understand. I just love that story.

Beckworth: That was a great story. David Mulford tells how he had to sit around in this really hot office, you said, that was in the middle of nowhere. They had this one machine. They had to call up some other city to get him connected to wait until some special time happened. They had one toilet that got flushed once a day. It was very primitive. What’s crazy is it’s primitive, but it’s also probably the most important source of funding for US Treasuries at the time. That’s so ironic. You’ve got the financial capital of New York and you’ve got this center in Saudi Arabia, very primitive, and they’re very much connected to each other.

The point you also make in that chapter, as you just did, is the importance of liquidity. We value the Treasury market because anyone can step in and step out without changing the price. You won’t create a fire cell of assets. You’ll maintain the value of the asset you’re selling. That’s key for these investors.

I think that’s an important point going forward. We want to maintain a market like that. We don’t want to do anything disruptive. There may be some disruptive things happening now we’ll talk about in a bit. Let’s move forward a bit. You mentioned Paul Volcker. It sounds like you may have actually chatted with him in your career.

Paul Volcker

Blustein: Oh, yes.

Beckworth: Tell us about Paul Volcker. You actually had had a conversation with the man, the legend among central bankers.

Blustein: Yes, I covered the Fed when I was a reporter at the Wall Street Journal, that was in the ’80s. My very first summer in the Wall Street Journal’s Washington bureau, I was given several months to go and write, to really go in-depth research on how the Fed had conquered inflation, because that was summer of 1984 that I was working on this. I interviewed just about everybody who was on the Federal Reserve Board, a lot of Federal Reserve Bank presidents, staff people, and people who had worked in the Carter administration, people who had worked in the Reagan administration, and, yes, absolutely Volcker himself, although he was always, always off the record.

The idea was I would tell how this mysterious institution worked because so many people are mystified. There were a lot of great human stories about the to and fro. The part that I think was most meaningful was how Volcker had run his plan for really jacking up interest rates. He had a very radical idea for how to go about doing that. He had talked to Charlie Schultze who was then chairman of the Council of Economic Advisers, and he also talked to William Miller who had actually been his predecessor as Fed chairman and then became Treasury secretary. They told him, “No, we don’t want you to do that. We object and President Carter himself. We think that’s a bad idea,” but Volcker basically went ahead.

The Reagan administration also had a lot of objections to what the Fed did. The Fed, of course, listened. It’s part of the government. They’re accountable to Congress and they have to listen to what people are saying. I think they respectfully did so. Because they viewed their independence as crucial, they went ahead. Restoring price stability they regarded as absolutely crucial, and they felt they had a political mandate for that from the American people. They went ahead and did it. I didn’t even think about this at the time I was doing my article, which I recount in the book, as you note.

This was really cementing a pillar of dollar dominance which is the independence of our central bank. In conquering inflation as they did and lowering the change in the CPI for the next several decades to less than 4% per annum, they established the Fed as really independent, and prepared to go do what they believed was necessary for the health of the American economy and in service to the prosperity and welfare of the American people. I think Jay Powell, the current chairman, has said, “Looking back on that, Paul Volcker is the guy who I want to model myself after.” That’s a very important pillar of dollar dominance.

Beckworth: What a great opportunity you had to interview all those people during that pivotal time. Man. I didn’t realize you had that experience. That’s fascinating. You sat down with the people who actually went through the great inflation and beat it and paid a price because they weren’t popular.

A book I read from that period, William Greider’s Secrets of the Temple, he’s a little more progressive on this issue, but he tells a very interesting story too, what happened during that time, how people were protesting. They had bricks. They had bricks and boards that they sent to the board. Some guy ran into the meeting with sawed-off shotgun. Because of what had happened, they had to put security. Apparently, you could just walk into the Federal Reserve back then. That whole experience changed things.

I’m curious, since I have a person who was there, who talked, who knows the moment, during that time, what do you think was more important to Paul Volcker and Fed success? Was it the strong personality of Paul Volcker himself? He’s like 6’7”. The images of him smoking a cigar in Congress like, “I’m here because I chose to be here,” kind of like, “I’m the man” vibe coming off of him. Maybe that’s important. You need a strong personality with a spine who can take criticism and push through, a great general.

At the same time, you mentioned that the public wanted some change. If you look at polling, and I’ve done this for some research, but you look at Gallup polling, inflation was the number one concern back then. People were worried about high prices more so than some of the other controversies of the period. In the late ’70s, early ’80s, inflation was the number one issue, despite everything else going on in the world. On one hand, the public had to be willing to tolerate some pain and give their blessing. If they were completely against it, you’d imagine, he would have lost his job before he did. Is it a combination of both of those things, or was it more Paul Volcker? What do you think?

Blustein: Oh, yes. I think Volcker is a very politically attuned guy. He played all these politicians very astutely. He couldn’t have brought the rest of him. He can’t just dictate what Fed policy is going to be. He’s got the whole Federal Open Market Committee, 12 members, some of whom are really well-trained economists and strong personalities in their own right, in some cases. His personality was certainly very important. He’s very good at getting his way. They felt that the American people wanted a really, really tough policy, slow the economy down; it’s too much money chasing too few goods. 

Eventually, they did reach a point in the fall of 1982 where it was by far the worst recession at that point since the Great Depression. Unemployment was reaching double-digit levels and so forth. Yes, auto dealers and construction people were protesting and farmers were driving tractors around the Fed. I think they felt that they had driven the economy into such a slowdown, that if they persisted, that they might recreate the terrible error that the Fed had committed in the early 1930s when it really let the economy collapse completely.

They eased up in the fall of 1982, but the crucial thing they did was after the economy began to rebound in 1983, they tightened up again to keep inflation from rebounding as the economy was coming out of this really terrible high unemployment period. They did that over the objections of the Reagan people. As it turned out, that was a very good thing because, remember, 1984 turned out to be a perfect year: low inflation, unemployment. That’s why Ronald Reagan was able to say, “it’s morning in America.”

You can argue about whether the Fed acted in an undemocratic way or if it tightened too much. All kinds of great debates about that. I completely respect the people who are critical, and Greider certainly is. I think, looking back on it, it was very painful to go through, but it was the right thing to do.

Beckworth: Paul, a question I have before we move on and come closer to the present in our discussion: Was the Fed not really something the public thought about much until Paul Volcker took over? In other words, at the time, clearly it was very much, for some people, enemy number one—the farmers, car dealers, builders. Maybe for the rest of Americans, they liked what the Fed was doing.

The Fed was on their radar screen. Before then, was it though? Was this a pivotal moment? William Greider’s book, Secrets of the Temple, a book like that written is like, “Look, folks, there’s something going on here that you don’t know about. You need to look inside.” Is that the impression you have that the public simply was business as usual until this happened?

Blustein: Yes. When inflation kicked up, in the late 1970s, I think there was a lot of attention paid to Arthur Burns. He was on the cover of Time magazine and this and that. This is one of the reasons why the Wall Street Journal had me go and do this article to explain this. It was an early version of Secrets of the Temple, if you like. How do they work? Does Volcker get to decide everything? What economic pressures cause them to act in the way that they do, and how do those decisions get made? Do they consult with the president of the United States? How does all that happen? That’s one of the reasons why I was assigned to do that.

As I was working on my book, this current book about the dollar, I realized that, luckily for me, I had done, in a sense, the reporting already, the research about this episode that I think is, looking back on it, maybe the single most important policy decision taken in the whole period of dollar dominance that cemented that dominance. Because it showed that we do have an independent central bank. I think that’s such an important pillar.

Dollar Dominance and Statecraft

Beckworth: Moving forward in your book, one of the big topics you cover is the use of this dollar dominance in statecraft, so financial statecraft, use of sanctions. You go through the story how many people thought we were overusing regular sanctions. They weren’t effective. Let’s have this new tool. You also outline how this really took off after 9/11, the Patriot Act, Section 311, I think we read, OFAC, the part of Treasury, and FinCEN, these parts of Treasury that actually go after and identify people or countries or institutions and then restrict from what can be used.

Maybe we can talk about the types of sanctions in a minute. One of the stories you tell in the book, really fascinating, it was a story of North Korea, and they had this supernote scandal. Tell us about this supernote scandal in North Korea.

Blustein: The North Koreans, who knew? They were the best counterfeiters of $100 bills. They produced incredibly good imitations of real US currency. Not enough to not to flood the US, but enough to enrich some of the people in the Kim Jong-il regime.

The whole US government was struggling with, how do we deal with this country that is causing so many problems for us, posing so many threats, and it was like the “Sopranos State.” This was a term that was coined by Sheena Chestnut, a very good political scientist, actually, in a thesis that she wrote.

We had no trade with North Korea, almost zero because it had already been isolated and we already had trade sanctions. The Treasury, based on what they had gotten in terms of powers in the Patriot Act after 9/11, realized that, no, financial sanctions, they had used to some extent before, particularly in the war on drugs, but they said, okay, let’s try to apply that to North Korea. Maybe that’s the way we can really hurt them.

One of the lines I’m most proud of in the book is where I say they were little kids, experimenting with a chemistry set, and, oh, look at this explosion we can make. They just went after one bank in Macau, the sleepy Portuguese colony off—well, it was then part of the People’s Republic of China—but they went after this tiny little bank in Macau that had had some transactions with North Korea and sanctioned it and said, “you’re a target. You can’t do business in the dollar system.”

Every bank in Asia began cutting off any connection with North Korea. It was this great explosion that they had with their chemistry set. That really brought home to the Treasury, the potency of this weapon that they had at their disposal. That was when they began realizing how they could use it for other adversaries and Iran was next, Russia, Venezuela. These things have been used more and more and more in the period since then.

Beckworth: The story of Iran is really a good one because it illustrates the primary versus secondary sanctions and how when Trump dropped the agreement that the US had with its allies about Iran’s nuclear program, Trump said, “we’re no longer going to do that. In fact, we’re going to impose sanctions, primary sanctions on the country itself, but then these secondary sanctions.”

If you’re a European company—and you mentioned in the book, Peugeot, the car dealer and some other firms, they had invested lots of money into the country and now they had to get out because if they did not, they would lose access to the global dollar system. The Europeans were very ticked off about this, right?

Blustein: Oh, they were furious. You can understand; their view was this Iran deal on its Iran nuclear program was working. This is a deal that had been struck under the Obama administration in 2015. It’s working. Okay, US. Okay, Donald Trump, if you want to take the view that it’s a bad deal, go ahead and cut off economic dealings with Iran, but we are going to continue.

No, we think the deal is working fine. We think they’re complying with it. We’re going to continue to do business with Iran. The Trump administration said, “Oh, yes.” I think it’s an incredibly revealing episode because the US was able to use the power of the dollar to force the European companies to stop doing business with Iran.

The governments, their policy was, no, as far as we’re concerned, we have no sanctions on Iran, but the companies all had to comply. Siemens, the big German conglomerate, Total, the French oil company, Maersk, the big Danish shipping company, they all had to fall into line because they were so worried about losing access to the dollar system.

It was terribly humiliating and frustrating. The Europeans couldn’t believe it. It was like, what? The US has this power? We’re going to start to figure out ways that we’re going to make the euro more usable for international transactions. We’re going to set up an institution that will enable the transmission of funds between our countries and Iran.

None of it worked because the dollar is so dominant and so powerful. I think that was, again, the big light bulb going off all over the world that, oh, my God. The US can force Europe, not the governments, the governments never said—

Beckworth: Right, but the private sector.

Blustein: It was the private sector, and that’s what mattered was that they weren’t willing to transact with Iran because they were choosing between doing business with Iran or losing access to the dollar market, it was a no-brainer for them. They said, okay, we don’t like it. We’ve got big investments in Iran, we’re going to have to write them off but they complied.

Beckworth: It is so fascinating that the Europeans were like, “Wow.” This moment of awareness. Many emerging markets for years had said that. You mentioned the leader of Brazil was like, “Why do we have to trade in dollars?” It’s just the dollar’s pervasive. It’s everywhere. It’s the global dollar system. You can’t escape it. It’s a powerful tool and it’s one that helps the US, but we don’t want to abuse it.

That’s the other point you bring in the book is this has been used so extensively. Are we overplaying our hand? The answer would be yes, if you’re concerned that we might lose dollar dominance, if something might happen to undermine it. Let me ask this: Why haven’t we seen other currencies compete; maybe have a multilateral world where we have multiple major reserve currencies, not just one?

I remember getting the Barry Eichengreen book, Exorbitant Privilege, and reading it. If I remember correctly, the tone of the book was, well, the euro looks like it’s a promising alternative, so watch out, dollar. It never happened. I remember even a Saturday Night Live skit where people are dressed as different currencies, and the dollar is getting beat up on by the other currencies, and the euro is poised to take over.

This is all in the early to mid-2000s when one of the big concerns was a dollar crisis, the big current account deficits. You probably remember that well, too. In fact, it’s in your books. You cover this. The euro never took off and took that role. Why did not the euro play a more major role?

What About the Euro?

Blustein: All the good qualities that the dollar has, the euro has. There’s a lot of them. There’s rule of law, there’s really sophisticated financial markets, it’s a big economy. I think in purchasing power parity, it’s probably a bigger block, the countries that use the euro, at least the European economy in general. It’s got all these good features, but what it doesn’t have is a big liquid market for one single safe asset like US Treasuries because these are all different sovereign governments. 

German bunds (bonds), the German government, they’re very safe. The German government’s almost obsessed with fiscal prudence. The Dutch bonds and Finnish bonds, but those are all different bonds of different sovereigns. Bonds that are denominated in euros include Italian bonds, Greek bonds, Spanish bonds. Those are not safe assets. We really learned this. This really became glaringly apparent because of the eurozone crisis that erupted in 2010. It went on for about five years after that. That was really the wake-up point about the euro. Yes, euro is a great currency. It is number two after the dollar and by almost any metric that you want to measure.

Of course, it’s used within Europe in international commerce. Countries that use the euro when they trade with each other, they tend to almost predominantly trade in euros. But when they trade outside of their own region, they tend to use dollars because the dollar is so dominant and because their counterpart, whoever they’re trading with or dealing with or borrowing from, whatever it is, is almost always going to be wanting to use dollars.

Beckworth: Yes, they could not do what Trump did to them. They don’t have that ability. I know the Europeans also have been reluctant to assertively make the euro an international currency. They’ve been hesitant. The biggest reason, I think, is what you’ve just outlined is that they don’t have a deep, liquid market of safe assets and they probably never will. The current push for populism and nationalism, and even in Germany right now, there’s more of an inward focus. Why should we be a part of this bigger project? It doesn’t look very promising that one day they’re going to have a European Union government bond. 

Now China, the story in China I’ve heard, and tell me if this makes sense, is one, they don’t want to fully open up their capital account. If they do, that means funds can flow across the border just at any whim, and the Communist Party loses control. You don’t want to give up control. Number two, of course, would be just the lack of trust in the institutions over there. If Xi Jinping can go after high tech one year, real estate another year, who’s to say your investment won’t be next? There’s just that lack of institutional trust. Those are the two key things. A third story I’ve heard, which is not necessary. I think you could develop an international currency without this, but this would certainly help. Given that the US is so far ahead, it would make sense if China wanted to have a reserve currency to run trade deficits. 

When a country runs trade deficits, it’s effectively exporting financial assets. They don’t have to do that to make it international, but that would help it get ahead. That completely goes against their view of economic growth. They want export-driven growth. They want to run trade surpluses. All these things seem to really say, China’s not very promising either.

I guess the other option might be some cryptocurrency. I just don’t see how you get enough balance sheet space or capacity from cryptos to make up for the footprint of the US dollar.

Cryptocurrency as a Rival to the Dollar

Blustein: Yes, definitely. Of all the substitutes that I looked at as possible rivals for the dollar, I’m pretty contemptuous about crypto. I hope readers will share my fiendish delight in my dedication, which is to my grandchildren, whom I always love unconditionally, even if they grow up to like crypto.

That does pretty much sum up my view about crypto. Not just that I don’t think any cryptocurrency is going to become the dominant world currency. The US would have to commit such catastrophic missteps in its own policy. Anyway, that dedication does sum up my view.

Beckworth: I guess if I had to make a stand here, I would say the area of crypto that I think could have the biggest impact would be stablecoins. That is just a crypto that’s backed by actual dollar assets. It would strengthen the dollar dominance effect. I don’t think the calls for a crypto strategic fund or reserve fund. 

And I’ve had George Selgin on the show. We’ve had this conversation before. I would encourage listeners to go back and talk about that. We don’t have time today to go into that, but I don’t see that making a big difference. Although, I know there’s listeners out there and folks who think it’s game-changing. I think it’s just going to prop up the value of crypto, and I’m not sure it’s going to have a big network effect.

Blustein: For my sins, I follow a lot of the people who argue in favor of a strategic bitcoin reserve. I really have tried to keep an open mind and see, is there something I’m missing in their argument? I’m amused to see that the counter-argument they make, the objection is, well, all you will be doing by creating a strategic bitcoin reserve is propping up the price of bitcoin. You’ll have taxpayer money going into it.

Their argument is, “No, that’s not our motivation. No. Perish the thought. Yes, it would have that effect. Yes, it would elevate the price of bitcoin. Yes, we would all get a lot richer, we bitcoiners, but no, that’s not our motivation. It’s because it’s a national security imperative. It’s because without that, the dollar is at grave risk of losing its dominance.”

My view is, well, no, it’s not a national security—the dollar will be just fine without a strategic bitcoin reserve. You are making this case for a strategic bitcoin reserve for errantly self-serving reasons and don’t fool yourself. Yes, I love the episode you had with George Selgin, where I thought he really debunked far more eloquently than I can, the argument. 

And what I love about the argument he made is, we don’t need bitcoin, we don’t need the gold reserve either. What underpins the dollar is not anything hard or anything finite; it’s the rule of law, it’s all the institutions that we have in a well-functioning central bank, which isn’t perfect, but which is a lot better than the alternatives. Those things are what underpin the dollar, and we don’t really need reserves because we’re the dominant currency. As long as we run fairly sensible economic policies, that will remain the case.

Drawbacks of Dollar Dominance

Beckworth: Let’s close on what could possibly go wrong with dollar dominance. You talk about this in the book, political dysfunction. If we get past the debt ceiling, something happens there: weaponization fatigue, we overuse financial sanctions, competing financial architecture. I think we already dealt that one.

We don’t think that’s really a viable alternative unless the US, in my view, would have to really crack up as a nation. You would literally have to have something happen to our country, unfathomable, unimaginable. I think if that happened, we’d have bigger fish to fry before we get there. It would be a second-, third-order question.

What could happen on the margin is we make mistakes, some policy choices. I want to bring up where we are today. I want to end here. There’s been a call for a Mar-a-Lago Accord with the present administration, and the idea is we want to devalue the dollar because we think this exorbitant privilege has propped the value up, it’s affected our industrial base. Let’s take the edge off of that.

I would say that the Trump administration would recognize there’s a benefit to dollar dominance. In fact, they even said they want to keep it, but they want to take the edge off of it, make it a little softer. They want to have their cake and eat it too. They want the dollar dominance, but they don’t want what they think is overvalued dollar.

According to this accord, they would use the threat of tariffs, they’d pull their military support, maybe both, and they would force some of these countries into long-term bonds, like a century bond, and force them to hold that, basically, much lower interest rates. We would pay them. That would give us extra funds back home, more fiscal stimulus.

We could make this work. There’s more details than that. Maybe we could flesh it out if you want to, but there’s more details. The Mar-a-Lago Accord would include, among other things, requiring foreign investors to effectively take a hit. I would call it a form of default. I think if we went down this path, it would greatly undermine the trust in the Treasury market. That concerns me, one.

Secondly, there was an article that came out recently in Reuters, and it talked about European officials thinking about what happens if we can’t depend on the Fed’s currency swap lines in the midst of a crisis. Now, to be fair, those currency swap lines were only used in really severe times. They don’t need it all the time. That, to me, is also a little unsettling, because one of the reasons we have a growth in global dollar markets is this expectation, in the worst times there will be this backup there.

If you take that away, it may, on the margin, discourage people holding more dollar assets. You want to reassure folks, hey, these institutions are there. The currency swap lines, the repo facilities for Foreign International Monetary Authorities, the FIMA repo, these will all be there. If you start hearing news stories, people questioning that, again, maybe these are just things that will pass, maybe the Mar-a-Lago Accord will never happen, but the fact that we’re having these conversations raises concerns.

Blustein: Oh, yes, absolutely. Let me just say three things about the Mar-a-Lago Accord. I also listened to the episode where you had Stephen Miran on here, very illuminating. I have a lot of respect [for him]. He’s clearly a very well-trained economist and he has a coherent idea about how to have their cake and eat it, too. Maintain dollar dominance, which Donald Trump has said absolutely, I think, would be like losing a war if we lost dollar dominance. At the same time, driving the exchange rate of the dollar down, which helps their blue-collar workers in the Rust Belt and all because the competitiveness of their companies would be enhanced.

It’s an interesting and, you can almost say, elegant argument. I’ll acknowledge that it’s coherent. I have three problems with it. First of all, I question whether dollar dominance really has meant that the dollar exchange rate is that much higher than it would otherwise be. The dollar has fluctuated a great deal over the 55-now-year period of floating rates.

There have been periods of time where it’s been quite weak, as recently as 2012. Up to then, it was quite weak. In the early ’90s, it was weak. In the ’70s, it was weak but it remained dominant. I question the benefit that we would get. There’s also questions about whether the exchange rate really affects the welfare—whether that’s really responsible for the decline in manufacturing employment in the United States.

That’s a whole other question. The benefits are, I would argue, minimal. The risks are just exactly what you just said, that suddenly there are all these concerns in the minds of people who hold the biggest dollar asset of all, Treasury markets, that they may get really nervous. If the Treasury market malfunctions, then we’ve got much bigger problems than just loss of dollar [dominance]. People don’t realize how economically terrifying that would be. 

The third point I make is that I think Trump has already, to use the technical term, he’s screwed the pooch, particularly by going after Canada as aggressively as he has, by threatening the Canadians with economic coercion. We’re going to take basically, with the goal in mind, which appears to be annexation and reneging completely on an agreement that he had struck during his first term with Canada on trade, which he claimed was a great, massive improvement on NAFTA.

Then just turning around and completely reneging on it and saying, “Well, it’s because of fentanyl and it’s because of lumber, and it’s because of you don’t let our bank”—all these, frankly, ludicrous justifications that he comes up with for coercing Canada. Clearly, I think he dreams of doubling the landmass of the United States and getting on Mount Rushmore that way, which I think is crazy.

Quite aside from the merits of whether we ought to double the landmass of the United States and subjugate the Canadians to annexation, which, okay, I’m sure listeners all have their opinions on that. In my fevered journalistic imagination, I’m thinking that Stephen Miran is sitting in his office, I guess it’s in the old executive office building where the Council of Economic Advisers is, and he’s clutching his head. He’s saying, “Oh, no. I had this plan. It was going to work. We were going to be able to maintain dollar dominance and lower the exchange rate and we’re going to have this big accord at Mar-a-Lago, and the Treasury and I were we were going to pull this off.” Oh, no. 

Every country in the world who might be involved in it is going to look at it and say, “but sorry, but your president doesn’t stick to his to his commitments. He just comes up with reasons for reneging and for the stupidest of reasons to try to annex Canada. No, we’re not doing a deal with you, even if we agree to it and you swear on a stack of Bibles, you’re going to you’re going to maintain military protection. You swear on a stack of Bibles, you’re going to keep tariffs low. Look at what your president does. No, thank you.”

Beckworth: To our closest ally, Canada.

Blustein: Yes, I just don’t see how they do it.

Beckworth: That’s a great point. You need multilateral agreement to have another treaty. What Stephen Miran has in mind is a new Plaza Accord. You talk about that in the book. Plaza Accord in the ’80s was a great way for the G7 countries to come together and they coordinated the devaluing of the dollar. That seems highly unlikely today.

Even before Trump, that seemed highly unlikely. Now, on top of that, he’s burned his bridges. Your point is, why would someone trust him if he does this to our closest ally, which as you mentioned, he himself said this was the most amazing treaty, the first administration. Now it’s junk. Why would any country trust him on this?

Blustein: I can’t imagine that any government that they would want to invite to Mar-a-Lago to send representatives would—maybe they would go. As I say, I’m very sorry for Stephen Miran because he spent obviously spent tremendous effort. 

Beckworth: Poor Stephen. He’s a friend of the show. He’s been on here twice. He had this ideal world where you would pull this out, have your cake and eat it to approach. Looks like that horse is out of the barn.

Blustein: I think so.

Beckworth: On that note, our time is up. Our guest today has been Paul Blustein. His book is King Dollar: The Past and Future of the World’s Dominant Currency. Be sure to get your copy. Paul, thank you for coming on the program.

Blustein: It’s been my pleasure. I really enjoyed it.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.