WEBVTT 00:00:00.000 --> 00:00:02.919 If you took a one dollar bill from, say, the 00:00:02.919 --> 00:00:05.360 era of the American Revolution and you tried 00:00:05.360 --> 00:00:07.740 to spend it today, it would be worth exactly 00:00:07.740 --> 00:00:09.839 three cents. Yeah, that's really not a great 00:00:09.839 --> 00:00:12.199 return on investment over a couple of centuries. 00:00:12.419 --> 00:00:16.519 Right. But here is the crazy part. That actively 00:00:16.519 --> 00:00:19.820 depreciating piece of paper somehow dictates 00:00:19.820 --> 00:00:22.920 the price of global oil. It can topple foreign 00:00:22.920 --> 00:00:25.160 governments and, you know, it essentially runs 00:00:25.160 --> 00:00:27.519 the entire world. It absolutely does. It's the 00:00:27.519 --> 00:00:30.339 engine of everything. Welcome to the deep dive 00:00:30.339 --> 00:00:33.079 today. We are taking that incredibly familiar 00:00:33.079 --> 00:00:34.960 piece of green paper That's probably sitting 00:00:34.960 --> 00:00:37.399 in your pocket right now, and we are completely 00:00:37.399 --> 00:00:39.420 decoding it. I'm excited for this one It's such 00:00:39.420 --> 00:00:43.039 a massive complex subject It really is our source 00:00:43.039 --> 00:00:45.479 material today is a remarkably comprehensive 00:00:45.479 --> 00:00:48.640 heavily detailed Wikipedia article It breaks 00:00:48.640 --> 00:00:51.399 down the history the hidden mechanics and honestly 00:00:51.399 --> 00:00:53.780 the sheer global dominance of the United States 00:00:53.780 --> 00:00:56.250 dollar We are essentially unpacking an everyday 00:00:56.250 --> 00:00:59.670 object to reveal this centuries -old epic. We're 00:00:59.670 --> 00:01:01.210 going to look at where it actually came from, 00:01:01.329 --> 00:01:03.750 how its values determine now that it's, well, 00:01:03.750 --> 00:01:06.290 not backed by physical gold anymore. Which still 00:01:06.290 --> 00:01:08.030 blows my mind a little bit. Right. And we'll 00:01:08.030 --> 00:01:10.150 get into the mechanisms that allow it to quietly 00:01:10.150 --> 00:01:13.250 dictate the financial reality of the entire planet. 00:01:13.469 --> 00:01:15.969 So consider this your shortcut to understanding 00:01:15.969 --> 00:01:19.230 the invisible forces running your everyday financial 00:01:19.230 --> 00:01:22.129 life. Because the story of the U .S. dollar isn't 00:01:22.129 --> 00:01:25.019 just a story about money. No, it's a story about 00:01:25.019 --> 00:01:28.920 politics warfare and above all collective trust. 00:01:29.400 --> 00:01:31.400 So, okay. Let's just look at the actual word 00:01:31.400 --> 00:01:35.819 first dollar we tend to think of it as this uniquely, 00:01:36.200 --> 00:01:38.719 quintessentially American invention, right? Yeah, 00:01:38.719 --> 00:01:40.620 truly. I mean, it's got American presence on 00:01:40.620 --> 00:01:43.379 it, American monuments, but the linguistic roots 00:01:43.379 --> 00:01:46.180 of that word have absolutely zero connection 00:01:46.180 --> 00:01:48.760 to North America. Yeah, the origins are surprisingly 00:01:48.760 --> 00:01:51.739 global. The word dollar actually traces all the 00:01:51.739 --> 00:01:54.459 way back to the 16th century, specifically to 00:01:54.459 --> 00:01:57.400 a silver mine in a Bohemian valley called Jürgemstal. 00:01:57.560 --> 00:02:00.180 OK, let's unpack this because I need to know 00:02:00.180 --> 00:02:03.000 how we get from a 16th century Bohemian silver 00:02:02.989 --> 00:02:06.409 mine to the modern American economy. It's basically 00:02:06.409 --> 00:02:08.830 through a linguistic game of telephone that spans 00:02:08.830 --> 00:02:12.509 hundreds of years. So the coins minted from that 00:02:12.509 --> 00:02:15.430 Bohemian silver, they were called Jochemstellers. 00:02:15.909 --> 00:02:18.250 Jochemstellers. That is a mouthful. Exactly. 00:02:18.710 --> 00:02:21.650 So over time, as those really heavy silver coins 00:02:21.650 --> 00:02:24.250 circulated across trade routes all over Europe, 00:02:24.990 --> 00:02:27.930 people naturally shortened the word. In German, 00:02:28.009 --> 00:02:30.759 it just became the taller. Oh, I see where this 00:02:30.759 --> 00:02:33.139 is going. Right. And as that word bounced around 00:02:33.139 --> 00:02:36.020 different languages and borders, like the Dutch 00:02:36.020 --> 00:02:38.139 started calling it the dollar. The Swedes called 00:02:38.139 --> 00:02:41.280 it the dollar. Wow. Yeah. And eventually it found 00:02:41.280 --> 00:02:44.319 its way into English as the word dollar. That 00:02:44.319 --> 00:02:47.639 is wild. But I mean, early Americans obviously 00:02:47.639 --> 00:02:49.840 weren't conducting business with old Bohemian 00:02:49.840 --> 00:02:51.960 silver. No, they definitely weren't. Because 00:02:51.960 --> 00:02:54.500 according to the sources, the real bedrock of 00:02:54.500 --> 00:02:57.340 early American commerce was actually Spanish 00:02:57.340 --> 00:02:59.800 money. What's fascinating here is that the newly 00:02:59.800 --> 00:03:01.919 formed United States, they didn't try to invent 00:03:01.919 --> 00:03:04.319 a brand new financial system out of thin air. 00:03:04.460 --> 00:03:06.620 That would be way too risky for a new country. 00:03:07.060 --> 00:03:09.620 Exactly. They needed a currency that people already 00:03:09.620 --> 00:03:13.780 deeply trusted. And from, well, the 16th all 00:03:13.780 --> 00:03:16.840 the way to the 19th centuries, the absolute global 00:03:16.840 --> 00:03:19.599 standard of trade was the Spanish -American silver 00:03:19.599 --> 00:03:22.360 dollar. Which was minted in places like Mexico 00:03:22.360 --> 00:03:25.400 City and Lima. Yeah. It was the really famous 00:03:25.400 --> 00:03:27.699 piece of eight. Oh, like from pirate movies. 00:03:28.139 --> 00:03:29.900 Exactly like that. So instead of forcing everyone 00:03:29.900 --> 00:03:32.520 to learn some entirely new concept of value, 00:03:33.120 --> 00:03:36.300 the U .S. just modeled its new currency directly 00:03:36.300 --> 00:03:39.659 on the Spanish peso to kind of co -opt that existing 00:03:39.659 --> 00:03:41.879 trust. That was the strategy. They wanted to 00:03:41.879 --> 00:03:44.240 ensure their new nation's currency would be accepted 00:03:44.240 --> 00:03:47.360 internationally from day one. In fact, Spanish, 00:03:47.580 --> 00:03:50.020 Mexican, and American dollars were all circulating 00:03:50.020 --> 00:03:51.819 side by side. This is all mixed together. Yep. 00:03:51.949 --> 00:03:54.270 And they were all perfectly valid legal tender 00:03:54.270 --> 00:03:57.590 in the U .S. all the way up until 1857. I love 00:03:57.590 --> 00:04:00.030 thinking about early American commerce functioning 00:04:00.030 --> 00:04:02.949 almost like this messy, chaotic cryptocurrency 00:04:02.949 --> 00:04:06.449 exchange. You know, that's a great analogy, actually. 00:04:06.669 --> 00:04:08.509 You've got a merchant trying to sell a barrel 00:04:08.509 --> 00:04:12.509 of flour, and the buyer is handing over a mix 00:04:12.509 --> 00:04:15.949 of Spanish silver, maybe a Mexican coin, and 00:04:15.949 --> 00:04:18.449 an early American penny. It was really just whatever 00:04:18.449 --> 00:04:21.529 piece of metal held the right intrinsic value. 00:04:21.730 --> 00:04:24.370 That tangible, physical weight of the silver 00:04:24.370 --> 00:04:27.290 was the key. It's so physical. It is. And that 00:04:27.290 --> 00:04:29.470 heavy Spanish influence is also where we get 00:04:29.470 --> 00:04:31.709 the famous dollar sign. I was wondering about 00:04:31.709 --> 00:04:33.730 that, the S with the lines through it. Yeah. 00:04:33.959 --> 00:04:36.860 The most widely accepted historical theory in 00:04:36.860 --> 00:04:39.740 our sources is that the dollar symbol evolved 00:04:39.740 --> 00:04:42.579 directly from the scribal abbreviation for the 00:04:42.579 --> 00:04:44.839 Spanish peso. Like how merchants would write 00:04:44.839 --> 00:04:47.319 it down. Exactly. They would write a P and an 00:04:47.319 --> 00:04:50.139 S next to each other in their ledgers. But over 00:04:50.139 --> 00:04:52.519 time, as clerks were just writing quickly, the 00:04:52.519 --> 00:04:54.459 P and the S were just written over each other. 00:04:54.540 --> 00:04:57.139 Oh, wow. Yeah. And that sort of merged into that 00:04:57.139 --> 00:04:59.819 iconic shape we use today. Though there's also 00:04:59.819 --> 00:05:02.399 a theory in the sources about the Spanish coat 00:05:02.399 --> 00:05:04.879 of arms playing a role, too. Right, the Pillars 00:05:04.879 --> 00:05:08.480 of Huckulees. Those old Spanish silver coins 00:05:08.480 --> 00:05:11.439 featured an image of two vertical bars wrapped 00:05:11.439 --> 00:05:14.660 in a swinging cloth band that forms this really 00:05:14.660 --> 00:05:17.779 distinctive S shape. So either way, the supreme 00:05:17.779 --> 00:05:21.000 symbol of American capitalism is basically thoroughly 00:05:21.000 --> 00:05:23.300 Spanish in origin. Yep, completely borrowed. 00:05:23.620 --> 00:05:26.540 And even the slang we use today is a ghost of 00:05:26.540 --> 00:05:29.199 that highly physical era, like calling a dollar 00:05:29.199 --> 00:05:32.019 a buck. The sources say that likely comes from 00:05:32.019 --> 00:05:34.860 the 18th century colonial leather trade, where 00:05:34.860 --> 00:05:37.439 buckskins were a standard unit of exchange. Which 00:05:37.439 --> 00:05:40.160 is such a visceral image. Totally. Or saying 00:05:40.160 --> 00:05:42.300 two bits for a quarter. I always wondered about 00:05:42.300 --> 00:05:44.339 that. The sources explain that the Spanish piece 00:05:44.339 --> 00:05:47.180 of eight was literally physically divided like 00:05:47.180 --> 00:05:49.540 chopped up into eight rialas or bits. So two 00:05:49.540 --> 00:05:51.399 bits is exactly a quarter of eight. Exactly. 00:05:51.540 --> 00:05:53.300 The language just holds onto the heavy metal 00:05:53.300 --> 00:05:55.160 long after the metal itself is actually gone. 00:05:55.300 --> 00:05:57.540 It really does. Which leads to the obvious question, 00:05:57.560 --> 00:06:00.639 how did we abandon the metal itself? Because, 00:06:00.959 --> 00:06:03.160 I mean, how did we transition from trusting hard 00:06:03.160 --> 00:06:06.300 physical silver from Mexico to trusting colorful 00:06:06.300 --> 00:06:08.750 little pieces of paper? Well, the transition 00:06:08.750 --> 00:06:11.110 outlined in the sources is pretty dramatic. It 00:06:11.110 --> 00:06:13.370 really starts with Alexander Hamilton and the 00:06:13.370 --> 00:06:16.310 Coinage Act of 1792. Setting up the ground rules. 00:06:16.490 --> 00:06:18.910 Right. Hamilton established what is called a 00:06:18.910 --> 00:06:22.410 bimetallic standard. Meaning two metals. Exactly. 00:06:23.269 --> 00:06:25.529 Functionally, this means the government guarantees 00:06:25.529 --> 00:06:28.110 that the currency can be freely exchanged for 00:06:28.110 --> 00:06:31.310 either of two specific metals, in this case, 00:06:31.569 --> 00:06:35.029 gold and silver, at a fixed legal ratio. So they 00:06:35.029 --> 00:06:37.290 basically pinned the paper to the metal? Yes. 00:06:37.670 --> 00:06:40.009 Hamilton meticulously calculated the value of 00:06:40.009 --> 00:06:44.889 the new US dollar to equal exactly 371 .25 grains 00:06:44.889 --> 00:06:47.750 of fine silver. So for a long time after that, 00:06:47.850 --> 00:06:49.730 Paper money in the U .S. was essentially just 00:06:49.730 --> 00:06:51.509 a code check receipt. A code check receipt? Yeah, 00:06:51.629 --> 00:06:53.550 it was just a certificate promising that you 00:06:53.550 --> 00:06:55.850 actually had that physical metal sitting safely 00:06:55.850 --> 00:06:57.410 in a vault somewhere. You would swap it back 00:06:57.410 --> 00:06:59.430 whenever you wanted. But then Abraham Lincoln 00:06:59.430 --> 00:07:03.209 had to fund the Civil War. And war requires massive 00:07:03.209 --> 00:07:05.529 immediate capital. You can't just wait around 00:07:05.529 --> 00:07:08.920 to dig up more silver. Exactly. To finance the 00:07:08.920 --> 00:07:11.759 Union Army without completely draining the country's 00:07:11.759 --> 00:07:14.240 precious metal reserves, the government issued 00:07:14.240 --> 00:07:17.240 what were called demand notes. The famous greenbacks. 00:07:17.399 --> 00:07:19.300 Yep. They were printed with a green ink on the 00:07:19.300 --> 00:07:22.519 back, earning that nickname. And this was a massive 00:07:22.519 --> 00:07:24.800 psychological leap. It was paper money issued 00:07:24.800 --> 00:07:27.279 by the government without the immediate strict 00:07:27.279 --> 00:07:29.860 backing of precious metals. And the sources show 00:07:29.860 --> 00:07:32.250 this caused a ton of friction. as the country 00:07:32.250 --> 00:07:35.029 expanded. There is an event they refer to as 00:07:35.029 --> 00:07:38.769 the crime of 73, which honestly sounds like a 00:07:38.769 --> 00:07:40.870 true crime podcast, but it was actually just 00:07:40.870 --> 00:07:43.689 the coinage act of 1873. Right. And it was a 00:07:43.689 --> 00:07:46.230 huge deal back then. It ended the minting of 00:07:46.230 --> 00:07:49.000 the standard silver dollar. By stopping the purchase 00:07:49.000 --> 00:07:51.220 and corning of silver, the U .S. effectively 00:07:51.220 --> 00:07:53.959 pushed the country away from bimetallism and 00:07:53.959 --> 00:07:55.939 strictly toward the gold standard. Which was 00:07:55.939 --> 00:07:58.639 officially adopted in 1900, right? Exactly. And 00:07:58.639 --> 00:08:00.819 silver miners and farmers felt deeply betrayed 00:08:00.819 --> 00:08:03.379 by the deflation that caused, hence calling it 00:08:03.379 --> 00:08:05.699 a crime. It's crazy how emotional money gets. 00:08:05.860 --> 00:08:08.759 Oh, always. But the ultimate severing of the 00:08:08.759 --> 00:08:11.579 tie to physical metal happened over two really 00:08:11.579 --> 00:08:14.000 dramatic events in the 20th century. Let's get 00:08:14.000 --> 00:08:16.540 into those. First, Franklin D. Roosevelt literally 00:08:16.540 --> 00:08:19.800 confiscated private gold holdings in 1933 during 00:08:19.800 --> 00:08:21.740 the Great Depression. He just ordered normal 00:08:21.740 --> 00:08:23.680 citizens to turn their gold into the Federal 00:08:23.680 --> 00:08:26.339 Reserve. He did. It was illegal to hoard it. 00:08:26.699 --> 00:08:30.160 And then came the final blow, the Nixon shock 00:08:30.160 --> 00:08:34.379 of 1971. President Richard Nixon suddenly and 00:08:34.379 --> 00:08:36.700 completely ended the convertibility of U .S. 00:08:36.879 --> 00:08:39.559 dollars to gold for foreign governments. So the 00:08:39.559 --> 00:08:42.039 dollar officially became a free -floating fiat 00:08:42.039 --> 00:08:44.730 currency. Yep. completely detached from gold. 00:08:44.789 --> 00:08:46.429 Okay, let me push back on that for a second. 00:08:46.970 --> 00:08:50.690 In 1971, Nixon completely severs the tie to gold. 00:08:51.080 --> 00:08:53.240 But what actually forces a president to wake 00:08:53.240 --> 00:08:55.019 up one day and just cancel the gold standard? 00:08:55.259 --> 00:08:58.019 It really comes down to basic math and international 00:08:58.019 --> 00:09:00.559 panic. The U .S. had been aggressively printing 00:09:00.559 --> 00:09:02.879 paper dollars to fund things like the Vietnam 00:09:02.879 --> 00:09:05.279 War and various domestic programs. They were 00:09:05.279 --> 00:09:07.860 writing checks their gold couldn't cash. Precisely. 00:09:08.179 --> 00:09:10.039 Foreign nations eventually realized that the 00:09:10.039 --> 00:09:12.100 United States had printed way more paper claims 00:09:12.100 --> 00:09:14.000 than they had actual physical gold sitting in 00:09:14.000 --> 00:09:16.360 Fort Knox. Oh, that's a problem. A huge problem. 00:09:16.899 --> 00:09:19.220 So foreign governments started rushing to cash 00:09:19.220 --> 00:09:21.360 in their dollars for the underlying gold before 00:09:21.360 --> 00:09:23.759 it ran out. It was essentially a massive bank 00:09:23.759 --> 00:09:26.259 run on a sovereign scale. A bank run on the U 00:09:26.259 --> 00:09:28.620 .S. government. Yeah. Fort Knox was draining 00:09:28.620 --> 00:09:31.200 so rapidly that Nixon just had to shut the gold 00:09:31.200 --> 00:09:34.440 window to stop the bleeding. So, OK, if Nixon 00:09:34.440 --> 00:09:37.960 severed that tie, what exactly is backing the 00:09:37.960 --> 00:09:40.759 dollar when you, the listener, go buy a cup of 00:09:40.759 --> 00:09:43.100 coffee today? I mean, is it literally just collective 00:09:43.100 --> 00:09:45.580 imagination? It sounds like it, doesn't it? Because 00:09:45.580 --> 00:09:47.899 today, we've got these colorful bills people 00:09:47.899 --> 00:09:51.129 jokingly call monopoly money. I mean, the sources 00:09:51.129 --> 00:09:53.649 even say the US Mint is halting the production 00:09:53.649 --> 00:09:56.669 of the penny for circulation in 2025 because 00:09:56.669 --> 00:09:58.929 the zinc and copper cost more than the actual 00:09:58.929 --> 00:10:01.190 coin is worth. Which is wild to think about. 00:10:01.429 --> 00:10:04.389 And they even detail a $100 ,000 bill featuring 00:10:04.389 --> 00:10:07.269 Woodrow Wilson that was only used for specific 00:10:07.269 --> 00:10:10.169 transfers between banks and is literally illegal 00:10:10.169 --> 00:10:12.740 for private citizens to own. The whole system 00:10:12.740 --> 00:10:15.159 is full of quirks. It all sounds a bit absurd 00:10:15.159 --> 00:10:17.600 when you really look at it. So what is functionally 00:10:17.600 --> 00:10:20.100 holding this whole thing up? This is the core 00:10:20.100 --> 00:10:22.940 mechanism of fiat currency. The word fiat is 00:10:22.940 --> 00:10:26.580 actually Latin and it means let it be done. The 00:10:26.580 --> 00:10:28.919 value isn't based on physical gold anymore. It's 00:10:28.919 --> 00:10:31.299 backed by the full faith and credit of the U 00:10:31.299 --> 00:10:33.620 .S. government. But what does full faith and 00:10:33.620 --> 00:10:36.950 credit actually mean in the real world? Practically 00:10:36.950 --> 00:10:40.129 speaking, that translates to two very real, very 00:10:40.129 --> 00:10:42.929 coercive mechanisms. First, the US government 00:10:42.929 --> 00:10:45.590 demands that you pay your taxes in US dollars. 00:10:45.690 --> 00:10:47.850 And if you don't pay your taxes in dollars, men 00:10:47.850 --> 00:10:49.710 with badges eventually show up at your door. 00:10:49.970 --> 00:10:52.929 Exactly. That threat alone creates a massive 00:10:52.929 --> 00:10:56.230 mandatory baseline demand for the currency. Everyone 00:10:56.230 --> 00:10:58.490 needs dollars to stay out of jail. Right. OK, 00:10:58.549 --> 00:11:00.730 that makes sense. And second, it is declared 00:11:00.730 --> 00:11:03.940 legal tender. By law, creditors must accept it 00:11:03.940 --> 00:11:06.120 for the payment of debts. So if I owe you money, 00:11:06.200 --> 00:11:08.759 I can just hand you dollars? Yes. If you owe 00:11:08.759 --> 00:11:11.120 a debt in the United States and you offer U .S. 00:11:11.480 --> 00:11:13.879 dollars, the creditor cannot legally refuse them 00:11:13.879 --> 00:11:16.240 and demand, you know, a bar of gold or a flock 00:11:16.240 --> 00:11:19.419 of sheep instead. It is backed by the legal and 00:11:19.419 --> 00:11:22.279 coercive power of the state. OK, so since there 00:11:22.279 --> 00:11:24.840 is no physical vault of gold acting as an anchor 00:11:24.840 --> 00:11:27.769 anymore. The responsibility of managing that 00:11:27.769 --> 00:11:30.289 fiat system has to fall to a centralized authority, 00:11:30.509 --> 00:11:33.049 right? Someone has to manage the money supply 00:11:33.049 --> 00:11:35.529 so the system doesn't just collapse under its 00:11:35.529 --> 00:11:37.529 own weight. That management falls directly to 00:11:37.529 --> 00:11:40.169 the Federal Reserve system. They act as the nation's 00:11:40.169 --> 00:11:42.370 central bank. And the sources show the Fed was 00:11:42.370 --> 00:11:46.009 created in 1913 specifically because the banking 00:11:46.009 --> 00:11:49.129 system kept experiencing these massive panics 00:11:49.129 --> 00:11:52.740 like the panic of 1907. So the Fed comes in and 00:11:52.740 --> 00:11:54.519 they operate under what is known as the dual 00:11:54.519 --> 00:11:57.120 mandate. Right. Their legally defined job is 00:11:57.120 --> 00:12:00.320 twofold. To promote maximum employment and to 00:12:00.320 --> 00:12:02.639 maintain stable prices. Which sounds incredibly 00:12:02.639 --> 00:12:05.220 difficult. It is. To achieve that delicate balance, 00:12:05.259 --> 00:12:07.320 they have to constantly control the money supply. 00:12:08.000 --> 00:12:09.759 You know, I find it helpful to think of the Federal 00:12:09.759 --> 00:12:13.080 Reserve like the operator of a massive hydroelectric 00:12:13.080 --> 00:12:15.600 dam. Oh, I like that. Where the water in the 00:12:15.600 --> 00:12:17.320 reservoir is the nation's cash supply, right? 00:12:17.659 --> 00:12:19.980 and the river flowing out into the valley below 00:12:19.980 --> 00:12:22.820 is the broader economy. So the Fed essentially 00:12:22.820 --> 00:12:26.519 has three main mechanisms or floodgates that 00:12:26.519 --> 00:12:28.679 they can use to control how much water reaches 00:12:28.679 --> 00:12:30.799 the valley. That perfectly illustrates their 00:12:30.799 --> 00:12:33.679 monetary policy tools. The first mechanism is 00:12:33.679 --> 00:12:36.820 the reserve requirement. The Fed dictates exactly 00:12:36.820 --> 00:12:39.259 what percentage of a commercial bank's deposits 00:12:39.259 --> 00:12:42.580 must be kept physically in the vault or at the 00:12:42.580 --> 00:12:45.139 Fed rather than being loaned out. So if the Fed 00:12:45.139 --> 00:12:47.440 raises that requirement, it's like raising the 00:12:47.440 --> 00:12:49.960 spillway on your dam. They hold more water back, 00:12:50.259 --> 00:12:52.679 banks issue fewer loans, and the broader money 00:12:52.679 --> 00:12:55.600 supply shrinks. OK, got it. And the second mechanism 00:12:55.600 --> 00:12:57.899 is the discount window. Right. Think of the discount 00:12:57.899 --> 00:13:00.539 window as an emergency pump. It's the interest 00:13:00.539 --> 00:13:02.720 rate at which commercial banks can borrow money 00:13:02.720 --> 00:13:05.279 directly from the Federal Reserve to meet those 00:13:05.279 --> 00:13:07.600 reserve requirements. But the biggest tool, the 00:13:07.600 --> 00:13:11.059 main floodgate, is open market operations. This 00:13:11.059 --> 00:13:14.039 is the heavy lifter. This is where the Fed actively 00:13:14.039 --> 00:13:17.600 buys or sells U .S. Treasury bonds. When they 00:13:17.600 --> 00:13:20.360 buy bonds from commercial banks, they pay for 00:13:20.360 --> 00:13:23.080 them by simply crediting the bank's reserve account 00:13:23.080 --> 00:13:25.559 with the Fed. OK, wait. Here's where it gets 00:13:25.559 --> 00:13:28.200 really interesting. because the sources point 00:13:28.200 --> 00:13:32.179 out the sheer scale of this mechanism. They discuss 00:13:32.179 --> 00:13:35.419 a metric called the Adjusted Monetary Base. Which 00:13:35.419 --> 00:13:37.519 is essentially the total amount of hard currency 00:13:37.519 --> 00:13:39.919 in circulation plus the reserve balances banks 00:13:39.919 --> 00:13:42.340 hold at the Fed. Right. And that monetary base 00:13:42.340 --> 00:13:46.899 jumped from about $800 billion in 2005 to over 00:13:46.899 --> 00:13:51.019 $3 trillion in 2013. A massive expansion. Massive. 00:13:51.039 --> 00:13:53.620 And when the Fed buys those securities, the source 00:13:53.620 --> 00:13:56.259 material explicitly states they create high powered 00:13:56.259 --> 00:13:59.279 money. They aren't moving existing tax dollars 00:13:59.279 --> 00:14:01.720 around. They're literally typing new numbers 00:14:01.720 --> 00:14:03.980 into a spreadsheet to credit an account. Just 00:14:03.980 --> 00:14:05.840 T -strokes. Isn't that incredibly dangerous? 00:14:06.000 --> 00:14:08.360 It carries an immense risk, yes. Now, the money 00:14:08.360 --> 00:14:10.960 isn't entirely thin air because that newly credited 00:14:10.960 --> 00:14:13.200 money is balanced on the Federal Reserve's balance 00:14:13.200 --> 00:14:16.100 sheet by the asset they just purchased, the Treasury 00:14:16.100 --> 00:14:18.320 bond. So there's some accounting logic to it. 00:14:18.639 --> 00:14:20.759 Yes, but the fundamental danger you're pointing 00:14:20.759 --> 00:14:24.279 out is very real. If the central bank increases 00:14:24.279 --> 00:14:26.539 the money supply too quickly relative to the 00:14:26.539 --> 00:14:29.179 actual economic output of the country, you trigger 00:14:29.179 --> 00:14:31.740 inflation. You have too much new money chasing 00:14:31.740 --> 00:14:34.100 too few goods. Which we've definitely seen happen. 00:14:34.379 --> 00:14:37.080 Exactly. It is an incredibly delicate balancing 00:14:37.080 --> 00:14:40.539 act that requires unwavering global trust. It 00:14:40.539 --> 00:14:44.279 was wild because that very trust the Fed cultivated 00:14:44.279 --> 00:14:47.379 actually ended up turning the dollar into an 00:14:47.379 --> 00:14:49.679 international weapon. It really did. Let's look 00:14:49.679 --> 00:14:52.139 at how the dollar conquered the globe. giving 00:14:52.139 --> 00:14:54.620 the US an advantage basically no other country 00:14:54.620 --> 00:14:57.820 has. Well, the modern era of dollar dominance 00:14:57.820 --> 00:15:00.740 really solidified in 1944 with the Bretton Woods 00:15:00.740 --> 00:15:03.460 Agreement. Toward the end of World War II, the 00:15:03.460 --> 00:15:06.379 United States was emerging as an undeniable economic 00:15:06.379 --> 00:15:08.759 superpower. Because Europe was devastated. Right. 00:15:09.000 --> 00:15:11.399 The U .S. infrastructure was largely unscathed 00:15:11.399 --> 00:15:13.799 by the war and they held massive amounts of the 00:15:13.799 --> 00:15:16.120 world's gold. So the Bretton Woods framework 00:15:16.120 --> 00:15:19.320 officially displaced the British pound and established 00:15:19.320 --> 00:15:21.580 the U .S. dollar as the world's primary reserve 00:15:21.580 --> 00:15:24.580 currency. The sources highlight a specific phrase 00:15:24.580 --> 00:15:26.960 for the advantage this gave the United States, 00:15:27.600 --> 00:15:30.279 the exorbitant privilege. I love that term. It's 00:15:30.279 --> 00:15:33.299 very fitting. Because the dollar is the foundational 00:15:33.299 --> 00:15:36.100 global reserve currency, the U .S. government 00:15:36.100 --> 00:15:39.220 can borrow trillions of dollars from global markets 00:15:39.220 --> 00:15:42.580 in its own currency at minimal interest rates 00:15:42.580 --> 00:15:46.179 and with virtually zero risk of default. Because 00:15:46.179 --> 00:15:48.899 if push comes to shove. The U .S. government 00:15:48.899 --> 00:15:51.000 can simply create the money to pay its debt. 00:15:51.240 --> 00:15:53.159 Exactly. They literally control the printer. 00:15:53.480 --> 00:15:56.100 But other countries face a very different reality. 00:15:56.179 --> 00:15:58.539 Oh, completely. If a corporation in an emerging 00:15:58.539 --> 00:16:01.039 market wants to raise capital, or a developing 00:16:01.039 --> 00:16:03.879 nation needs an infrastructure loan, international 00:16:03.879 --> 00:16:06.139 lenders often demand that the debt be issued 00:16:06.139 --> 00:16:09.100 in U .S. dollars. So those foreign nations take 00:16:09.100 --> 00:16:11.799 on massive exchange rate risks. Which can be 00:16:11.799 --> 00:16:14.360 devastating. Right. If their local currency drops 00:16:14.360 --> 00:16:17.200 in value, suddenly their dollar denominated debt 00:16:17.200 --> 00:16:19.740 becomes impossible to pay off. The U .S. just 00:16:19.740 --> 00:16:22.389 gets to completely ignore that risk. And the 00:16:22.389 --> 00:16:24.590 physical reach of this privilege is staggering. 00:16:25.230 --> 00:16:28.850 You have official users like Ecuador, El Salvador, 00:16:29.450 --> 00:16:32.570 Panama, and Micronesia who simply use the US 00:16:32.570 --> 00:16:35.409 dollar as their own national currency. They just 00:16:35.409 --> 00:16:37.509 gave up their own money. Yeah. And then you have 00:16:37.509 --> 00:16:40.110 unofficial users where the dollar is preferred 00:16:40.110 --> 00:16:42.789 over hyperinflated local money, like in Cambodia 00:16:42.789 --> 00:16:45.700 or Venezuela. The sources actually note that 00:16:45.700 --> 00:16:48.799 over 80 percent of all physical U .S. hundred 00:16:48.799 --> 00:16:51.500 dollar bills are held overseas. 80 percent. That 00:16:51.500 --> 00:16:54.720 is insane. There is an entire financial ecosystem 00:16:54.720 --> 00:16:57.039 of what are called euro dollars, which are simply 00:16:57.039 --> 00:17:00.080 U .S. dollars held in foreign bank accounts completely 00:17:00.080 --> 00:17:02.500 outside the jurisdiction of the Federal Reserve. 00:17:02.679 --> 00:17:04.259 So if we connect this to the bigger picture, 00:17:04.819 --> 00:17:07.740 how does the U .S. utilize this power? Because 00:17:07.740 --> 00:17:11.410 the sources bring up Swift. the Global Financial 00:17:11.410 --> 00:17:13.589 Messaging Network, and they mentioned the U .S. 00:17:13.789 --> 00:17:15.829 exercises considerable oversight over it. To 00:17:15.829 --> 00:17:17.890 understand the power of SWIFT, you really have 00:17:17.890 --> 00:17:20.309 to understand the mechanism of modern international 00:17:20.309 --> 00:17:22.650 money movement. Money isn't physical pallets 00:17:22.650 --> 00:17:25.670 of cash on cargo ships. It's coordinated ledger 00:17:25.670 --> 00:17:28.009 updates between banks. Just data moving around. 00:17:28.289 --> 00:17:31.430 Right. Swift is the secure messaging system banks 00:17:31.430 --> 00:17:34.690 use to verify those updates. Because international 00:17:34.690 --> 00:17:37.490 trade overwhelmingly relies on the dollar, the 00:17:37.490 --> 00:17:39.789 U .S. has the unique ability to pressure that 00:17:39.789 --> 00:17:42.289 network. So they can use it as leverage. Absolutely. 00:17:42.869 --> 00:17:45.289 If the US imposes financial sanctions and cuts 00:17:45.289 --> 00:17:48.170 a foreign entity off from SWIFT, those foreign 00:17:48.170 --> 00:17:50.150 banks can no longer communicate with the global 00:17:50.150 --> 00:17:52.549 network. The ledgers can't update. The money 00:17:52.549 --> 00:17:55.390 effectively freezes. Wow. So what does this all 00:17:55.390 --> 00:17:57.650 mean for the rest of the world? I mean, we constantly 00:17:57.650 --> 00:18:01.210 hear politicians advocate for a strong dollar 00:18:01.210 --> 00:18:04.000 policy. As an impartial observer looking at the 00:18:04.000 --> 00:18:06.859 sources, does the global community actually benefit 00:18:06.859 --> 00:18:09.660 from this? Or is it purely a weapon for American 00:18:09.660 --> 00:18:12.240 interests? That is deeply debated. Impartially 00:18:12.240 --> 00:18:14.599 speaking, the dollar does provide a highly stable, 00:18:14.880 --> 00:18:17.440 highly liquid medium for global trade. Global 00:18:17.440 --> 00:18:20.220 commodities, most notably oil, are priced and 00:18:20.220 --> 00:18:22.539 traded in dollars. That consistency has to lubricate 00:18:22.539 --> 00:18:24.819 the global economy, right? It does. It makes 00:18:24.819 --> 00:18:28.500 international trade vastly easier. But conversely, 00:18:28.720 --> 00:18:31.240 it grants the United States immense geopolitical 00:18:31.240 --> 00:18:34.279 leverage. They can effectively lock a rogue nation 00:18:34.279 --> 00:18:36.940 out of the global economy without firing a single 00:18:36.940 --> 00:18:39.440 shot, which forces other countries to play by 00:18:39.440 --> 00:18:41.740 U .S. financial rules. It's a double -edged sword 00:18:41.740 --> 00:18:44.619 for sure. But, you know, that immense global 00:18:44.619 --> 00:18:47.839 power comes at a highly localized cost for the 00:18:47.839 --> 00:18:50.140 person listening to this right now. How so? Well, 00:18:50.339 --> 00:18:52.579 the most immediate, tangible impact of the U 00:18:52.579 --> 00:18:55.319 .S. dollar isn't international sanctions. It's 00:18:55.319 --> 00:18:57.319 what your dollar can actually buy at the grocery 00:18:57.319 --> 00:18:59.819 store today compared to yesterday. Ah, right, 00:18:59.980 --> 00:19:01.980 inflation. Exactly. We need to talk about the 00:19:01.980 --> 00:19:04.509 hidden tax of inflation. The historical data 00:19:04.509 --> 00:19:06.930 on purchasing power in our sources is actually 00:19:06.930 --> 00:19:08.930 quite stark. If you look at the buying power 00:19:08.930 --> 00:19:12.490 of a US dollar in 1774 and compare it to 2012, 00:19:13.069 --> 00:19:16.150 the currency has lost about 97 % of its purchasing 00:19:16.150 --> 00:19:18.869 power. 97%. So like we said at the time, a dollar 00:19:18.869 --> 00:19:22.450 from 1775 is worth roughly $0 .03 today. Exactly. 00:19:22.769 --> 00:19:25.329 The sharpest declines in value usually correspond 00:19:25.329 --> 00:19:28.269 to major crises. There were massive drops in 00:19:28.269 --> 00:19:30.250 purchasing power during the Civil War, World 00:19:30.250 --> 00:19:32.250 War I, and World War II, when the government 00:19:32.250 --> 00:19:34.410 dramatically increased the money supply to fund 00:19:34.410 --> 00:19:36.410 those conflicts. They just printed what they 00:19:36.410 --> 00:19:39.490 needed. Right. Then, after the Nixon shock severed 00:19:39.490 --> 00:19:44.049 the gold tie in 1971, the 1970s saw rampant stagflation. 00:19:44.230 --> 00:19:46.470 Which is high inflation coupled with stagnant 00:19:46.470 --> 00:19:48.769 economic growth, right? Yes. The dollar lost 00:19:48.769 --> 00:19:51.599 two -thirds of its value between 1965 and in 00:19:51.599 --> 00:19:54.019 1981 alone. It was a really tough period. The 00:19:54.019 --> 00:19:56.319 sources mentioned Paul Volcker coming in as Fed 00:19:56.319 --> 00:19:59.519 chairman in the early 1980s. And he had to severely 00:19:59.519 --> 00:20:02.059 tighten the money supply, raising interest rates 00:20:02.059 --> 00:20:04.319 to these really punishing levels to finally stabilize 00:20:04.319 --> 00:20:07.140 things. It was painful, but it worked. But here's 00:20:07.140 --> 00:20:09.759 the mechanism I want to clarify. The sources 00:20:09.759 --> 00:20:12.200 state that modern central banks actively target 00:20:12.200 --> 00:20:14.920 a low, stable inflation rate, usually around 00:20:14.920 --> 00:20:18.119 2%. That's the goal, yes. OK. But if we have 00:20:18.119 --> 00:20:22.380 lost 97 % of our buying power, it seems absurd 00:20:22.380 --> 00:20:25.259 that central banks actively want 2 % inflation. 00:20:26.339 --> 00:20:29.339 I mean, as a saver, I want zero inflation so 00:20:29.339 --> 00:20:33.930 my money holds its exact value. Why deliberately 00:20:33.930 --> 00:20:36.549 erode it? I know, it deeply contradicts our personal 00:20:36.549 --> 00:20:39.130 financial logic, but economists argue there is 00:20:39.130 --> 00:20:41.910 a vital macroeconomic mechanism behind it. Okay, 00:20:41.970 --> 00:20:44.650 lay it on me. While a constant value sounds perfect 00:20:44.650 --> 00:20:47.730 for an individual savings account, a macroeconomy 00:20:47.730 --> 00:20:50.390 behaves differently. Economists generally agree 00:20:50.390 --> 00:20:53.049 that a low, highly predictable rate of inflation 00:20:53.049 --> 00:20:56.170 actually stimulates investment. because sitting 00:20:56.170 --> 00:20:58.789 on cash becomes a losing game. Exactly. If you 00:20:58.789 --> 00:21:00.950 know your cash will be worth slightly less next 00:21:00.950 --> 00:21:03.430 year, you are motivated to spend it or invest 00:21:03.430 --> 00:21:05.829 it in a business today rather than just stuffing 00:21:05.829 --> 00:21:08.089 it under a mattress. It basically forces the 00:21:08.089 --> 00:21:09.910 water to keep moving through the dam. That's 00:21:09.910 --> 00:21:11.869 a perfect way to put it. More importantly, it 00:21:11.869 --> 00:21:14.750 prevents the mechanism of deflation. If prices 00:21:14.750 --> 00:21:16.549 are constantly dropping, meaning your dollar 00:21:16.549 --> 00:21:19.109 buys more tomorrow than it does today, consumers 00:21:19.109 --> 00:21:21.470 naturally delay their spending. Sure. Why buy 00:21:21.470 --> 00:21:23.529 a car today if it's cheaper next month? Right. 00:21:24.049 --> 00:21:26.690 But as spending stops, businesses see plunging 00:21:26.690 --> 00:21:29.190 revenues, they have to lay off workers, unemployment 00:21:29.190 --> 00:21:32.329 spikes, and the entire economy enters a deflationary 00:21:32.329 --> 00:21:35.690 spiral. That is historically devastating and 00:21:35.690 --> 00:21:38.349 incredibly difficult for a central bank to arrest. 00:21:38.549 --> 00:21:41.049 That makes a lot of sense. And I suppose targeting 00:21:41.049 --> 00:21:44.089 2 % inflation also gives the central bank a mechanical 00:21:44.089 --> 00:21:46.609 buffer, right? How do you mean? Well, if inflation 00:21:46.609 --> 00:21:49.349 were sitting at zero, interest rates would also 00:21:49.349 --> 00:21:52.589 likely be near zero during normal times, which 00:21:52.589 --> 00:21:54.490 would leave the Federal Reserve with absolutely 00:21:54.490 --> 00:21:57.210 no room to lower rates to stimulate the economy 00:21:57.210 --> 00:22:00.170 during a sudden recession. They'd have no levers 00:22:00.170 --> 00:22:02.769 left to pull. That is exactly the functional 00:22:02.769 --> 00:22:05.529 reality. And the era known as the Great Moderation 00:22:05.529 --> 00:22:08.650 from the 1980s through the early 2000s is largely 00:22:08.650 --> 00:22:11.410 credited to this policy of targeting low stable 00:22:11.410 --> 00:22:13.910 inflation. So it's a necessary evil. Essentially, 00:22:14.369 --> 00:22:16.750 it means your dollar will slowly intentionally 00:22:16.750 --> 00:22:19.869 lose value over time. But the overarching economic 00:22:19.869 --> 00:22:22.549 environment remains highly stable. Well, we have 00:22:22.549 --> 00:22:24.009 covered a staggering amount of ground today. 00:22:24.029 --> 00:22:26.609 We really have. We started in a 16th century 00:22:26.609 --> 00:22:29.160 bohemian silver valley. We followed the Spanish 00:22:29.160 --> 00:22:31.740 pieces of aid to the American colonies, navigated 00:22:31.740 --> 00:22:34.839 the absolute chaos of Civil War greenbacks, and 00:22:34.839 --> 00:22:36.900 examined the mechanics of the Nixon shock. Quite 00:22:36.900 --> 00:22:39.319 the journey. And then we explored how the Federal 00:22:39.319 --> 00:22:42.160 Reserve uses ledgers to manage the monetary base, 00:22:42.480 --> 00:22:45.000 and how the exorbitant privilege of the dollar 00:22:45.000 --> 00:22:48.200 allows the U .S. to project immense geopolitical 00:22:48.200 --> 00:22:52.119 power across the globe, all while carefully managing 00:22:52.119 --> 00:22:55.420 a 2 % slow burn loss of your purchasing power. 00:22:55.440 --> 00:22:58.359 It is a profoundly interconnected mechanism. 00:22:59.039 --> 00:23:00.900 And building on everything we have discussed, 00:23:01.339 --> 00:23:03.339 the source material actually leaves us with a 00:23:03.339 --> 00:23:05.480 critical forward -looking issue. What's that? 00:23:05.960 --> 00:23:08.200 Well, we've learned that the entire power of 00:23:08.200 --> 00:23:11.039 the modern US dollar rests strictly on collective 00:23:11.039 --> 00:23:13.359 global trust and the government's exorbitant 00:23:13.359 --> 00:23:16.519 privilege. But as noted in the see also section 00:23:16.519 --> 00:23:19.440 of our sources, there is a rapidly growing global 00:23:19.440 --> 00:23:22.680 conversation around de -dollarization. De -dollarization. 00:23:23.019 --> 00:23:26.549 Yeah. As the world becomes more digitized, and 00:23:26.549 --> 00:23:29.009 as foreign powers actively explore alternative 00:23:29.009 --> 00:23:31.670 payment networks specifically to bypass the threat 00:23:31.670 --> 00:23:34.930 of U .S. swift sanctions, what happens to the 00:23:34.930 --> 00:23:37.250 American economy if the rest of the world simply 00:23:37.250 --> 00:23:39.369 decides to stop trusting that piece of green 00:23:39.369 --> 00:23:42.890 paper? If foreign nations stop buying U .S. debt, 00:23:43.170 --> 00:23:46.009 that exorbitant privilege evaporates. So the 00:23:46.009 --> 00:23:48.410 big question is, will the buck eventually stop 00:23:48.410 --> 00:23:51.170 here? That is absolutely something to chew on. 00:23:51.430 --> 00:23:53.109 Thank you so much for joining us on this deep 00:23:53.109 --> 00:23:56.130 dive. My pleasure. And to you listening, the 00:23:56.130 --> 00:23:58.349 next time you are standing at the register and 00:23:58.349 --> 00:24:00.609 you hand over a physical dollar bill for your 00:24:00.609 --> 00:24:03.349 morning coffee, I hope you take a second to really 00:24:03.349 --> 00:24:05.710 look at it. Look at the green ink, the old Spanish 00:24:05.710 --> 00:24:07.430 symbols, and realize you aren't just holding 00:24:07.430 --> 00:24:10.130 money. You're holding a piece of paper that literally 00:24:10.130 --> 00:24:12.789 relies on the shared imagination of 8 billion 00:24:12.789 --> 00:24:15.410 people to keep the world turning. We'll see you 00:24:15.410 --> 00:24:15.849 next time.