Money beyond borders: a book review

I’ve read over 200 history books and biographies. The two great drivers of history are war and money. For a dose of military history, I recently read “The Dark Path” by Williamson Murray. A big take-home of that book was how often victory depended on superior finances. For economic history, I’ve read “Money: The true story of a made-up thing” by Jacob Goldstein, “The world for sale” by Jack Farchy and Javier Blas and “Our dollar, your problem” by Kenneth Rogoff. But to understand the history of international finance, I turned to “Money Beyond Borders: Global Currencies from Croesus to Crypto” by Barry Eichengreen. 

This book begins with deep dives into the minting of Greek silver tetradrachms and Roman silver denarius, and the consequences of debasement by rulers like Nero. Both nations reached well beyond their borders with their coins, both through trade and by paying their far-flung militaries in coin.. Eichengreen argues that the fall of the Roman empire was brought on by infectious disease carried from remote places through trade and by lead poisoning as a byproduct of silver smelting.

The Florentine florin arose to become an international currency that circulated throughout Europe and parts of the Levant. Its popularity helped, and was helped by, innovations in banking in Florence. As these innovations were copied elsewhere, the florin went into decline, aided by the growth and military power of larger states.

The Spanish silver dollar was the first true global currency, driven by the discovery of massive amounts of silver in Mexico and Peru. Pieces of eight cost more than the silver they were made from because of their uniformity, external certification and reputation for maintaining their value. In addition, silver ingots were sometimes subject to customs duties at international borders, unlike pieces of eight. They became the reference unit against which exchange rates were fixed. In 1834, Spanish and Mexican silver coins still accounted for 25% of coins in US circulation. By 1837, pieces of eight could be exchanged for one US dollar.

 

As Spanish silver went into decline in the 17^th century, the Dutch were creating the first pure fiat currency, delinking credit from precious metal. The book details a century-long process beginning with a variety of Dutch-minted coins of both gold and silver. The expansion of international trade through the government-supported Dutch East India Company and the Bank of Amsterdam, which held gold and silver on behalf of merchants. Amsterdam became a global hub of global foreign exchange and credit during this period, with transactions denominated in guilders. The liquidity and security afforded by the Bank of Amsterdam made merchants willing to accept either coins or bank notes equally. Eventually, bank notes were no longer redeemable for coin, creating a de facto fiat currency. Bank money was more liquid, safer and easier to transfer than coins. To this day, the Netherlands Bank is among the top ten gold-holding central banks.

Eventually, Dutch financial hegemony surrendered to France and England. The British East India Company broke the Dutch monopoly in the spice trade and competed in textiles and coffee production. The British government took exception to the Dutch trade with their North American colonies. Eventually, the cost of defending their interests brought down both the Dutch East India Company and the Bank of Amsterdam, its primary lender, in a textbook example of sunk costs. When France occupied the Netherlands in 1795, the Dutch financial system collapsed.

London stepped into the vacuum of Dutch collapse and had surpassed Amsterdam as a trading center by 1780. England had a robust financial system by the 18^th century. During the 19^th century, the sterling bill of exchange became virtually an international currency. England’s rise was hastened by the French revolution and Napoleonic wars. Eventually, sterling’s roles as a mechanism for financing trade, as a vehicle for payment and as an asset in which banks held their liquid reserves were reinforcing and crystallized sterling’s international status. As a notable illustration, the Chinese war indemnity of 1895, financed by Russia, was paid to Japan in sterling.

The ascendancy of the dollar took a big step with the federal reserve act of 1913 when the US finally adopted European-style money markets and created a central bank to be a lender of last resort. The disruptions of two world wars completed the displacement of sterling by the dollar, although as Eichengreen shows, the path was not smooth. Nevertheless, with the 1944 Breton Woods Conference and the Marshall plan to equip Europe with dollars, the dollar’s status as the world’s reserve currency was secured.

 

Through the 1950s and ‘60s, the underlying challenge to the dollar was gold interconvertibility. As had already been anticipated, dollars in international circulation exceeded US gold holdings, endangering the $35/ounce gold exchange rate. By 1968, the US and six other countries abandoned the collective commitment to maintain a world price of gold at $35/ounce. By August 1971, the US closed the gold window to foreign dollar-holders, leaving other currencies to float against the dollar. By the end of 1971, the US had devalued the dollar relative to gold; this had no practical effect since the gold window remained closed.  In October 1976, the government officially changed the definition of the dollar and references to gold were removed from statutes. From this point, the international monetary system was made of pure fiat money. 

Since that time, the dollar has continued as the world’s reserve currency. The euro, established in 1999, was envisioned as a counterweight to the dollar. Since then, the dollar has retained its global primacy. The euro project has been stymied by the lack of a common Treasury and integrated capital market. But the Trump administration embrace of Putin’s Russia and contempt for European alliances could drive EU member states together and erode dollar dominance.

Meanwhile, China has been trying to internationalize the renminbi. Still, midway into the third decade of the 21^st century, the dollar continues to dwarf the renminbi in international transactions. Of course, the dollar had a century head start; perhaps in another few decades, the renminbi will catch up.

What about cryptocurrency? Nouriel Roubini called Bitcoin “shitcoin” because it is too volatile to satisfy the definition of money as a store of value. What about stablecoins, which are pegged to a fixed exchange rate with established currencies? That peg promise is only as good as the regulators, who are not government entities. Who enforces the good practices that insure stable exchange rates? Currently, 99% of all stablecoins are linked to the dollar, which simply extends dollar dominance.

One alternative to stablecoins is central bank digital currency, digital tokens that provide a direct claim on central banks. There are other alternatives in various stages of development, albeit so far only for domestic use and small transactions; none so far qualify as global currencies discussed previously. Whether any alternative can be scaled to compete with dollars, euros and/or renminbi remains to be seen. Ultimately, politics, not technology will prove the biggest barrier.

Current trends in global growth and trading patterns predict a decline in dollar dominance, and the Trump Administration anti-immigration and tariff policies, combined with a ballooning national debt and US disinvestment in education and science look to accelerate the dollar’s decline as a global currency. Yet there’s no single currency currently on the horizon to replace the dollar.

There is considerable discussion at the end of this book about the future of the dollar. While highlighting the nature of forces in play, the book avoids predictions. Given how whimsical and capricious the Trump Administration policies have been, this is wise as the shelf life of any specific prediction is short in the current political climate. The money quote:

“In the end, the fate of the dollar will rest on the willingness of America’s leaders to uphold the rule of law, respect the separation of powers, and honor the country’s commitments to its foreign partners. It will depend on the readiness of Congress, the courts, and the public to hold their feet to the fire.”

That fate is proving increasingly precarious with each passing day.

Eichengreen flags many twists and turns of innovation, crisis and a few financial shenanigans that informed the growth of international banking and credit. His writing is lively and even witty (!) in parts.

I learned a good bit of history from this book. I also gained an additional appreciation for the workings of international finance, although I’m sure I didn’t understand many of the details owing to the use of unfamiliar jargon. There are plenty of footnote, which are easy to access using an e-reader. This is a very readable book; if you are interested in the forces that explain current events, I recommend it.