If you took a one dollar bill from, say, the
era of the American Revolution and you tried
to spend it today, it would be worth exactly
three cents. Yeah, that's really not a great
return on investment over a couple of centuries.
Right. But here is the crazy part. That actively
depreciating piece of paper somehow dictates
the price of global oil. It can topple foreign
governments and, you know, it essentially runs
the entire world. It absolutely does. It's the
engine of everything. Welcome to the deep dive
today. We are taking that incredibly familiar
piece of green paper That's probably sitting
in your pocket right now, and we are completely
decoding it. I'm excited for this one It's such
a massive complex subject It really is our source
material today is a remarkably comprehensive
heavily detailed Wikipedia article It breaks
down the history the hidden mechanics and honestly
the sheer global dominance of the United States
dollar We are essentially unpacking an everyday
object to reveal this centuries -old epic. We're
going to look at where it actually came from,
how its values determine now that it's, well,
not backed by physical gold anymore. Which still
blows my mind a little bit. Right. And we'll
get into the mechanisms that allow it to quietly
dictate the financial reality of the entire planet.
So consider this your shortcut to understanding
the invisible forces running your everyday financial
life. Because the story of the U .S. dollar isn't
just a story about money. No, it's a story about
politics warfare and above all collective trust.
So, okay. Let's just look at the actual word
first dollar we tend to think of it as this uniquely,
quintessentially American invention, right? Yeah,
truly. I mean, it's got American presence on
it, American monuments, but the linguistic roots
of that word have absolutely zero connection
to North America. Yeah, the origins are surprisingly
global. The word dollar actually traces all the
way back to the 16th century, specifically to
a silver mine in a Bohemian valley called Jürgemstal.
OK, let's unpack this because I need to know
how we get from a 16th century Bohemian silver
mine to the modern American economy. It's basically
through a linguistic game of telephone that spans
hundreds of years. So the coins minted from that
Bohemian silver, they were called Jochemstellers.
Jochemstellers. That is a mouthful. Exactly.
So over time, as those really heavy silver coins
circulated across trade routes all over Europe,
people naturally shortened the word. In German,
it just became the taller. Oh, I see where this
is going. Right. And as that word bounced around
different languages and borders, like the Dutch
started calling it the dollar. The Swedes called
it the dollar. Wow. Yeah. And eventually it found
its way into English as the word dollar. That
is wild. But I mean, early Americans obviously
weren't conducting business with old Bohemian
silver. No, they definitely weren't. Because
according to the sources, the real bedrock of
early American commerce was actually Spanish
money. What's fascinating here is that the newly
formed United States, they didn't try to invent
a brand new financial system out of thin air.
That would be way too risky for a new country.
Exactly. They needed a currency that people already
deeply trusted. And from, well, the 16th all
the way to the 19th centuries, the absolute global
standard of trade was the Spanish -American silver
dollar. Which was minted in places like Mexico
City and Lima. Yeah. It was the really famous
piece of eight. Oh, like from pirate movies.
Exactly like that. So instead of forcing everyone
to learn some entirely new concept of value,
the U .S. just modeled its new currency directly
on the Spanish peso to kind of co -opt that existing
trust. That was the strategy. They wanted to
ensure their new nation's currency would be accepted
internationally from day one. In fact, Spanish,
Mexican, and American dollars were all circulating
side by side. This is all mixed together. Yep.
And they were all perfectly valid legal tender
in the U .S. all the way up until 1857. I love
thinking about early American commerce functioning
almost like this messy, chaotic cryptocurrency
exchange. You know, that's a great analogy, actually.
You've got a merchant trying to sell a barrel
of flour, and the buyer is handing over a mix
of Spanish silver, maybe a Mexican coin, and
an early American penny. It was really just whatever
piece of metal held the right intrinsic value.
That tangible, physical weight of the silver
was the key. It's so physical. It is. And that
heavy Spanish influence is also where we get
the famous dollar sign. I was wondering about
that, the S with the lines through it. Yeah.
The most widely accepted historical theory in
our sources is that the dollar symbol evolved
directly from the scribal abbreviation for the
Spanish peso. Like how merchants would write
it down. Exactly. They would write a P and an
S next to each other in their ledgers. But over
time, as clerks were just writing quickly, the
P and the S were just written over each other.
Oh, wow. Yeah. And that sort of merged into that
iconic shape we use today. Though there's also
a theory in the sources about the Spanish coat
of arms playing a role, too. Right, the Pillars
of Huckulees. Those old Spanish silver coins
featured an image of two vertical bars wrapped
in a swinging cloth band that forms this really
distinctive S shape. So either way, the supreme
symbol of American capitalism is basically thoroughly
Spanish in origin. Yep, completely borrowed.
And even the slang we use today is a ghost of
that highly physical era, like calling a dollar
a buck. The sources say that likely comes from
the 18th century colonial leather trade, where
buckskins were a standard unit of exchange. Which
is such a visceral image. Totally. Or saying
two bits for a quarter. I always wondered about
that. The sources explain that the Spanish piece
of eight was literally physically divided like
chopped up into eight rialas or bits. So two
bits is exactly a quarter of eight. Exactly.
The language just holds onto the heavy metal
long after the metal itself is actually gone.
It really does. Which leads to the obvious question,
how did we abandon the metal itself? Because,
I mean, how did we transition from trusting hard
physical silver from Mexico to trusting colorful
little pieces of paper? Well, the transition
outlined in the sources is pretty dramatic. It
really starts with Alexander Hamilton and the
Coinage Act of 1792. Setting up the ground rules.
Right. Hamilton established what is called a
bimetallic standard. Meaning two metals. Exactly.
Functionally, this means the government guarantees
that the currency can be freely exchanged for
either of two specific metals, in this case,
gold and silver, at a fixed legal ratio. So they
basically pinned the paper to the metal? Yes.
Hamilton meticulously calculated the value of
the new US dollar to equal exactly 371 .25 grains
of fine silver. So for a long time after that,
Paper money in the U .S. was essentially just
a code check receipt. A code check receipt? Yeah,
it was just a certificate promising that you
actually had that physical metal sitting safely
in a vault somewhere. You would swap it back
whenever you wanted. But then Abraham Lincoln
had to fund the Civil War. And war requires massive
immediate capital. You can't just wait around
to dig up more silver. Exactly. To finance the
Union Army without completely draining the country's
precious metal reserves, the government issued
what were called demand notes. The famous greenbacks.
Yep. They were printed with a green ink on the
back, earning that nickname. And this was a massive
psychological leap. It was paper money issued
by the government without the immediate strict
backing of precious metals. And the sources show
this caused a ton of friction. as the country
expanded. There is an event they refer to as
the crime of 73, which honestly sounds like a
true crime podcast, but it was actually just
the coinage act of 1873. Right. And it was a
huge deal back then. It ended the minting of
the standard silver dollar. By stopping the purchase
and corning of silver, the U .S. effectively
pushed the country away from bimetallism and
strictly toward the gold standard. Which was
officially adopted in 1900, right? Exactly. And
silver miners and farmers felt deeply betrayed
by the deflation that caused, hence calling it
a crime. It's crazy how emotional money gets.
Oh, always. But the ultimate severing of the
tie to physical metal happened over two really
dramatic events in the 20th century. Let's get
into those. First, Franklin D. Roosevelt literally
confiscated private gold holdings in 1933 during
the Great Depression. He just ordered normal
citizens to turn their gold into the Federal
Reserve. He did. It was illegal to hoard it.
And then came the final blow, the Nixon shock
of 1971. President Richard Nixon suddenly and
completely ended the convertibility of U .S.
dollars to gold for foreign governments. So the
dollar officially became a free -floating fiat
currency. Yep. completely detached from gold.
Okay, let me push back on that for a second.
In 1971, Nixon completely severs the tie to gold.
But what actually forces a president to wake
up one day and just cancel the gold standard?
It really comes down to basic math and international
panic. The U .S. had been aggressively printing
paper dollars to fund things like the Vietnam
War and various domestic programs. They were
writing checks their gold couldn't cash. Precisely.
Foreign nations eventually realized that the
United States had printed way more paper claims
than they had actual physical gold sitting in
Fort Knox. Oh, that's a problem. A huge problem.
So foreign governments started rushing to cash
in their dollars for the underlying gold before
it ran out. It was essentially a massive bank
run on a sovereign scale. A bank run on the U
.S. government. Yeah. Fort Knox was draining
so rapidly that Nixon just had to shut the gold
window to stop the bleeding. So, OK, if Nixon
severed that tie, what exactly is backing the
dollar when you, the listener, go buy a cup of
coffee today? I mean, is it literally just collective
imagination? It sounds like it, doesn't it? Because
today, we've got these colorful bills people
jokingly call monopoly money. I mean, the sources
even say the US Mint is halting the production
of the penny for circulation in 2025 because
the zinc and copper cost more than the actual
coin is worth. Which is wild to think about.
And they even detail a $100 ,000 bill featuring
Woodrow Wilson that was only used for specific
transfers between banks and is literally illegal
for private citizens to own. The whole system
is full of quirks. It all sounds a bit absurd
when you really look at it. So what is functionally
holding this whole thing up? This is the core
mechanism of fiat currency. The word fiat is
actually Latin and it means let it be done. The
value isn't based on physical gold anymore. It's
backed by the full faith and credit of the U
.S. government. But what does full faith and
credit actually mean in the real world? Practically
speaking, that translates to two very real, very
coercive mechanisms. First, the US government
demands that you pay your taxes in US dollars.
And if you don't pay your taxes in dollars, men
with badges eventually show up at your door.
Exactly. That threat alone creates a massive
mandatory baseline demand for the currency. Everyone
needs dollars to stay out of jail. Right. OK,
that makes sense. And second, it is declared
legal tender. By law, creditors must accept it
for the payment of debts. So if I owe you money,
I can just hand you dollars? Yes. If you owe
a debt in the United States and you offer U .S.
dollars, the creditor cannot legally refuse them
and demand, you know, a bar of gold or a flock
of sheep instead. It is backed by the legal and
coercive power of the state. OK, so since there
is no physical vault of gold acting as an anchor
anymore. The responsibility of managing that
fiat system has to fall to a centralized authority,
right? Someone has to manage the money supply
so the system doesn't just collapse under its
own weight. That management falls directly to
the Federal Reserve system. They act as the nation's
central bank. And the sources show the Fed was
created in 1913 specifically because the banking
system kept experiencing these massive panics
like the panic of 1907. So the Fed comes in and
they operate under what is known as the dual
mandate. Right. Their legally defined job is
twofold. To promote maximum employment and to
maintain stable prices. Which sounds incredibly
difficult. It is. To achieve that delicate balance,
they have to constantly control the money supply.
You know, I find it helpful to think of the Federal
Reserve like the operator of a massive hydroelectric
dam. Oh, I like that. Where the water in the
reservoir is the nation's cash supply, right?
and the river flowing out into the valley below
is the broader economy. So the Fed essentially
has three main mechanisms or floodgates that
they can use to control how much water reaches
the valley. That perfectly illustrates their
monetary policy tools. The first mechanism is
the reserve requirement. The Fed dictates exactly
what percentage of a commercial bank's deposits
must be kept physically in the vault or at the
Fed rather than being loaned out. So if the Fed
raises that requirement, it's like raising the
spillway on your dam. They hold more water back,
banks issue fewer loans, and the broader money
supply shrinks. OK, got it. And the second mechanism
is the discount window. Right. Think of the discount
window as an emergency pump. It's the interest
rate at which commercial banks can borrow money
directly from the Federal Reserve to meet those
reserve requirements. But the biggest tool, the
main floodgate, is open market operations. This
is the heavy lifter. This is where the Fed actively
buys or sells U .S. Treasury bonds. When they
buy bonds from commercial banks, they pay for
them by simply crediting the bank's reserve account
with the Fed. OK, wait. Here's where it gets
really interesting. because the sources point
out the sheer scale of this mechanism. They discuss
a metric called the Adjusted Monetary Base. Which
is essentially the total amount of hard currency
in circulation plus the reserve balances banks
hold at the Fed. Right. And that monetary base
jumped from about $800 billion in 2005 to over
$3 trillion in 2013. A massive expansion. Massive.
And when the Fed buys those securities, the source
material explicitly states they create high powered
money. They aren't moving existing tax dollars
around. They're literally typing new numbers
into a spreadsheet to credit an account. Just
T -strokes. Isn't that incredibly dangerous?
It carries an immense risk, yes. Now, the money
isn't entirely thin air because that newly credited
money is balanced on the Federal Reserve's balance
sheet by the asset they just purchased, the Treasury
bond. So there's some accounting logic to it.
Yes, but the fundamental danger you're pointing
out is very real. If the central bank increases
the money supply too quickly relative to the
actual economic output of the country, you trigger
inflation. You have too much new money chasing
too few goods. Which we've definitely seen happen.
Exactly. It is an incredibly delicate balancing
act that requires unwavering global trust. It
was wild because that very trust the Fed cultivated
actually ended up turning the dollar into an
international weapon. It really did. Let's look
at how the dollar conquered the globe. giving
the US an advantage basically no other country
has. Well, the modern era of dollar dominance
really solidified in 1944 with the Bretton Woods
Agreement. Toward the end of World War II, the
United States was emerging as an undeniable economic
superpower. Because Europe was devastated. Right.
The U .S. infrastructure was largely unscathed
by the war and they held massive amounts of the
world's gold. So the Bretton Woods framework
officially displaced the British pound and established
the U .S. dollar as the world's primary reserve
currency. The sources highlight a specific phrase
for the advantage this gave the United States,
the exorbitant privilege. I love that term. It's
very fitting. Because the dollar is the foundational
global reserve currency, the U .S. government
can borrow trillions of dollars from global markets
in its own currency at minimal interest rates
and with virtually zero risk of default. Because
if push comes to shove. The U .S. government
can simply create the money to pay its debt.
Exactly. They literally control the printer.
But other countries face a very different reality.
Oh, completely. If a corporation in an emerging
market wants to raise capital, or a developing
nation needs an infrastructure loan, international
lenders often demand that the debt be issued
in U .S. dollars. So those foreign nations take
on massive exchange rate risks. Which can be
devastating. Right. If their local currency drops
in value, suddenly their dollar denominated debt
becomes impossible to pay off. The U .S. just
gets to completely ignore that risk. And the
physical reach of this privilege is staggering.
You have official users like Ecuador, El Salvador,
Panama, and Micronesia who simply use the US
dollar as their own national currency. They just
gave up their own money. Yeah. And then you have
unofficial users where the dollar is preferred
over hyperinflated local money, like in Cambodia
or Venezuela. The sources actually note that
over 80 percent of all physical U .S. hundred
dollar bills are held overseas. 80 percent. That
is insane. There is an entire financial ecosystem
of what are called euro dollars, which are simply
U .S. dollars held in foreign bank accounts completely
outside the jurisdiction of the Federal Reserve.
So if we connect this to the bigger picture,
how does the U .S. utilize this power? Because
the sources bring up Swift. the Global Financial
Messaging Network, and they mentioned the U .S.
exercises considerable oversight over it. To
understand the power of SWIFT, you really have
to understand the mechanism of modern international
money movement. Money isn't physical pallets
of cash on cargo ships. It's coordinated ledger
updates between banks. Just data moving around.
Right. Swift is the secure messaging system banks
use to verify those updates. Because international
trade overwhelmingly relies on the dollar, the
U .S. has the unique ability to pressure that
network. So they can use it as leverage. Absolutely.
If the US imposes financial sanctions and cuts
a foreign entity off from SWIFT, those foreign
banks can no longer communicate with the global
network. The ledgers can't update. The money
effectively freezes. Wow. So what does this all
mean for the rest of the world? I mean, we constantly
hear politicians advocate for a strong dollar
policy. As an impartial observer looking at the
sources, does the global community actually benefit
from this? Or is it purely a weapon for American
interests? That is deeply debated. Impartially
speaking, the dollar does provide a highly stable,
highly liquid medium for global trade. Global
commodities, most notably oil, are priced and
traded in dollars. That consistency has to lubricate
the global economy, right? It does. It makes
international trade vastly easier. But conversely,
it grants the United States immense geopolitical
leverage. They can effectively lock a rogue nation
out of the global economy without firing a single
shot, which forces other countries to play by
U .S. financial rules. It's a double -edged sword
for sure. But, you know, that immense global
power comes at a highly localized cost for the
person listening to this right now. How so? Well,
the most immediate, tangible impact of the U
.S. dollar isn't international sanctions. It's
what your dollar can actually buy at the grocery
store today compared to yesterday. Ah, right,
inflation. Exactly. We need to talk about the
hidden tax of inflation. The historical data
on purchasing power in our sources is actually
quite stark. If you look at the buying power
of a US dollar in 1774 and compare it to 2012,
the currency has lost about 97 % of its purchasing
power. 97%. So like we said at the time, a dollar
from 1775 is worth roughly $0 .03 today. Exactly.
The sharpest declines in value usually correspond
to major crises. There were massive drops in
purchasing power during the Civil War, World
War I, and World War II, when the government
dramatically increased the money supply to fund
those conflicts. They just printed what they
needed. Right. Then, after the Nixon shock severed
the gold tie in 1971, the 1970s saw rampant stagflation.
Which is high inflation coupled with stagnant
economic growth, right? Yes. The dollar lost
two -thirds of its value between 1965 and in
1981 alone. It was a really tough period. The
sources mentioned Paul Volcker coming in as Fed
chairman in the early 1980s. And he had to severely
tighten the money supply, raising interest rates
to these really punishing levels to finally stabilize
things. It was painful, but it worked. But here's
the mechanism I want to clarify. The sources
state that modern central banks actively target
a low, stable inflation rate, usually around
2%. That's the goal, yes. OK. But if we have
lost 97 % of our buying power, it seems absurd
that central banks actively want 2 % inflation.
I mean, as a saver, I want zero inflation so
my money holds its exact value. Why deliberately
erode it? I know, it deeply contradicts our personal
financial logic, but economists argue there is
a vital macroeconomic mechanism behind it. Okay,
lay it on me. While a constant value sounds perfect
for an individual savings account, a macroeconomy
behaves differently. Economists generally agree
that a low, highly predictable rate of inflation
actually stimulates investment. because sitting
on cash becomes a losing game. Exactly. If you
know your cash will be worth slightly less next
year, you are motivated to spend it or invest
it in a business today rather than just stuffing
it under a mattress. It basically forces the
water to keep moving through the dam. That's
a perfect way to put it. More importantly, it
prevents the mechanism of deflation. If prices
are constantly dropping, meaning your dollar
buys more tomorrow than it does today, consumers
naturally delay their spending. Sure. Why buy
a car today if it's cheaper next month? Right.
But as spending stops, businesses see plunging
revenues, they have to lay off workers, unemployment
spikes, and the entire economy enters a deflationary
spiral. That is historically devastating and
incredibly difficult for a central bank to arrest.
That makes a lot of sense. And I suppose targeting
2 % inflation also gives the central bank a mechanical
buffer, right? How do you mean? Well, if inflation
were sitting at zero, interest rates would also
likely be near zero during normal times, which
would leave the Federal Reserve with absolutely
no room to lower rates to stimulate the economy
during a sudden recession. They'd have no levers
left to pull. That is exactly the functional
reality. And the era known as the Great Moderation
from the 1980s through the early 2000s is largely
credited to this policy of targeting low stable
inflation. So it's a necessary evil. Essentially,
it means your dollar will slowly intentionally
lose value over time. But the overarching economic
environment remains highly stable. Well, we have
covered a staggering amount of ground today.
We really have. We started in a 16th century
bohemian silver valley. We followed the Spanish
pieces of aid to the American colonies, navigated
the absolute chaos of Civil War greenbacks, and
examined the mechanics of the Nixon shock. Quite
the journey. And then we explored how the Federal
Reserve uses ledgers to manage the monetary base,
and how the exorbitant privilege of the dollar
allows the U .S. to project immense geopolitical
power across the globe, all while carefully managing
a 2 % slow burn loss of your purchasing power.
It is a profoundly interconnected mechanism.
And building on everything we have discussed,
the source material actually leaves us with a
critical forward -looking issue. What's that?
Well, we've learned that the entire power of
the modern US dollar rests strictly on collective
global trust and the government's exorbitant
privilege. But as noted in the see also section
of our sources, there is a rapidly growing global
conversation around de -dollarization. De -dollarization.
Yeah. As the world becomes more digitized, and
as foreign powers actively explore alternative
payment networks specifically to bypass the threat
of U .S. swift sanctions, what happens to the
American economy if the rest of the world simply
decides to stop trusting that piece of green
paper? If foreign nations stop buying U .S. debt,
that exorbitant privilege evaporates. So the
big question is, will the buck eventually stop
here? That is absolutely something to chew on.
Thank you so much for joining us on this deep
dive. My pleasure. And to you listening, the
next time you are standing at the register and
you hand over a physical dollar bill for your
morning coffee, I hope you take a second to really
look at it. Look at the green ink, the old Spanish
symbols, and realize you aren't just holding
money. You're holding a piece of paper that literally
relies on the shared imagination of 8 billion
people to keep the world turning. We'll see you
next time.