The reported demise of US greenback dominance has been tremendously exaggerated. The greenback’s demise has been repeatedly prophesied, supposedly threatened by any variety of currencies together with the euro, the yuan, and up to date hints of a gold-backed foreign money from the BRICS nations (Brazil, Russia, India, and China).
Will the US greenback preserve its world dominance? Is there a job for bitcoin in US coverage?
In a current paper titled “The Treasury Standard: Causes and Consequences,” which was revealed in an edited volume of articles related to bitcoin, economist and AIER SMP Senior Fellow Joshua R. Hendrickson explores the historic relationship between central banking and nationwide safety. He finds that the US greenback dominance of the worldwide financial system and related demand for US Treasury bonds helps reinforce America’s world army regime.
Additional, the paper demonstrates how American officers and insurance policies have actively contributed to increasing this technique.
Hendrickson dubs this technique “The Treasury Normal.” His paper has essential implications for the way forward for bitcoin and the way it could be handled by governments.
Learn ‘The Treasury Normal’
There’s a lot to love in “The Treasury Normal.” First, Hendrickson devotes two full sections to the federal government’s historic function in cash. Part 2 begins with theories of commodity cash and coinage earlier than transferring to payments of trade and banknotes. The evolutionary course of he describes matches the historic proof.
Various theories emphasize the role of the state in creating cash and figuring out the kind of cash used. As Hendrickson appropriately notes, nonetheless, governments didn’t create cash. Relatively, they’ve constantly intervened within the financial system to profit themselves by means of “debasement, devaluation, and foreign money issuance,” typically on the expense of the general public. Regardless of such abuses, emergency spending powers are important to the preservation of the nation itself. These prices and advantages should steadiness as a way to reduce hurt to the general public and maximize long-run stability.
Within the case of america, the ascendance of the Treasury Normal strengthened the rising relationship between nationwide safety and the financial system. It solidified the Treasury’s worldwide affect by making international powers reliant on US coverage. Nevertheless, persistent deficits, as skilled in current many years, might destabilize this equilibrium.
Second, Hendrickson addresses a difficulty that’s typically prevented by economists: the function of coverage in creating the Treasury Normal. Economists like easy tales in regards to the impact of value controls and different insurance policies, which could embody capital controls or trade fee manipulations in worldwide finance. In distinction to the same old financial method, Hendrickson describes the Treasury Normal as a mixture of coordinated insurance policies and political strain to attain a said finish: greenback dominance.
Coverage Implications
Whereas Hendrickson doesn’t focus on bitcoin straight within the paper, he nonetheless supplies some perception for serious about bitcoin-related insurance policies. Ought to the US authorities encourage bitcoin adoption? Ought to it maintain bitcoin as a reserve asset? How would such pro-bitcoin insurance policies have an effect on its fiscal and financial coverage?
Worldwide Bitcoin Adoption
On the floor, better bitcoin adoption would appear to undermine the Treasury Normal. However that solely holds if one assumes these adopting bitcoin would have in any other case used the greenback. If, as a substitute, one expects bitcoin to displace different main currencies, then its ascension may bolster the Treasury Normal by functioning as a impartial greenback various.
The Treasury’s choice to weaponize the greenback by means of sanctions and exclusions from the SWIFT financial institution routing community has made the greenback much less engaging to international governments. Foreigners are already beginning to flip away from the greenback, and international governments are actively growing greenback alternate options. On this context, the US advantages—that’s, suffers much less—from the adoption of a impartial various like bitcoin. Ideally, the Treasury would really like foreigners to proceed utilizing the greenback, but when they do transfer away from the greenback, the Treasury would favor them to modify to bitcoin slightly than to the yuan, ruble, or another foreign money managed by one or extra rival governments.
In fact, bitcoin is just helpful to the US on this context if foreigners favor it to the out there alternate options. The success of the Swiss franc suggests they could use bitcoin as a reserve asset or to be used in worldwide commerce. As a consequence of its well-known secure long-term worth, the Swiss franc is extensively utilized in worldwide commerce as a automobile foreign money–that’s, between events in non-Swiss nations, not with the nation of Switzerland itself. As I’ve discussed elsewhere, “regardless of Switzerland having solely the Nineteenth-largest economic system by way of GDP, the Swiss franc is the 4th mostly used foreign money in worldwide commerce and the sixth most generally held international reserve foreign money.” Thus, there appears to be sturdy demand for a secure foreign money in worldwide commerce, and bitcoin provides much more safety in opposition to the chance of financial expansions than the Swiss franc.
Authorities Bitcoin ‘Hodling’
What if the Treasury itself have been to carry (or “hodl” in crypto lingo) bitcoin, as in proposals such because the Strategic Bitcoin Reserve? As Hendrickson has elsewhere explained, holding bitcoin would offer stability by means of diversification of the federal government’s belongings, creating an possibility that might be exercised if the Treasury’s fiscal place deteriorates. The federal government’s dedication to bitcoin might have some self-reinforcing worth of stabilizing the worth, setting expectations and quelling complaints of the asset being intrinsically nugatory.
Regardless of these advantages, it’s not clear what results “hodling” bitcoin would have on the federal authorities’s fiscal place. A better bitcoin value (which most Bitcoiners take with no consideration, however many others query) would allow a bitcoin-holding authorities to pay down a few of its debt. However it could not require it. The truth is, politicians may reply to the next bitcoin value—or, even an anticipated increased bitcoin value—by spending much more! Thus, a bitcoin reserve could not have the results many Bitcoiners count on except it’s coupled with different insurance policies that constrain spending.
BitBonds
One other proposal would see the federal government challenge Treasury bonds which are no less than partly backed by bitcoin, with any income realized from the bitcoin backing shared between traders and the federal government. These “BitBonds,” proponents argue, would permit the federal government to benefit from the chance discount related to diversification and, in doing so, decrease the federal government’s price of borrowing. Some personal corporations are already taking an analogous method as a way to finance real estate loans. The BitBonds proposal can be much like a proposal by Judy Shelton, which might see the US Treasury challenge bonds backed by gold.
As with the bitcoin reserve proposal, it’s not clear that issuing BitBonds would do a lot to enhance the federal government’s monetary place. Such proposals, on their very own, don’t constrain federal spending. Certainly, they loosen up the prevailing constraints on spending, which could encourage politicians to spend much more.
Bitcoin and the Fed
Whereas the fiscal advantages of a bitcoin reserve or BitBonds are unclear, some level to potential financial advantages. Would the institution of a bitcoin reserve or the issuance of BitBonds present an efficient constraint on the actions of the Fed? Perhaps. The reply will depend on how such efforts have been applied.
Holding bitcoin as a reserve asset doesn’t straight constrain the Fed. Home holders of Federal Reserve notes haven’t been in a position to redeem these notes for any asset since we went off the gold standard in 1933. Even when the Fed nonetheless owned gold in the present day (which it does not), it could not be required to redeem {dollars} for gold. Equally, if the Fed have been to carry bitcoin reserves, it could be beneath no obligation to redeem its notes for bitcoin. It would promote its bitcoin to guard the buying energy of the greenback, ought to the demand for {dollars} decline. However it could not be required to take action. Therefore, holding bitcoin—by itself—wouldn’t constrain the Fed. It might merely give the Fed an possibility much like that supplied by different belongings the Fed holds.
Though holding bitcoin wouldn’t constrain the Fed, the existence of bitcoin may. If bitcoin have been to supply a impartial greenback various in worldwide finance, as beforehand mentioned, it could present another for greenback customers involved about increased inflation. The Fed must take that exit possibility under consideration when setting coverage. Therefore, the Fed’s capacity to devalue the greenback could be restricted if bitcoin supplies greenback customers with a beautiful various. To be clear: I don’t imagine bitcoin represents a critical menace to the greenback within the close to future. Nevertheless, all adjustments are marginal, and marginally increased inflation would encourage some greenback customers to rely extra closely on alternate options, together with bitcoin.
The prospect of widespread switching to bitcoin is particularly pertinent when contemplating excessive situations. Take into account, for instance, what would occur if the Treasury’s fiscal imbalances proceed to the purpose of close to default. Many assume the Fed would intervene to assist the economic system, reducing rates of interest and inflating the greenback to keep away from fiscal default. Nevertheless, bitcoin—and, certainly, any credible greenback various—would restrict the Fed’s capacity to take action. Furthermore, a normal understanding that the Fed will likely be restricted in its capacity to mitigate the injury of default raises the anticipated prices of default. Therefore, the existence of bitcoin may encourage politicians to rein in extreme spending or increase further income as a way to keep away from approaching default within the first place.
Conclusion
Hendrickson takes historical past and politics significantly. In “The Treasury Normal,” he supplies a principle of greenback dominance within the post-Bretton Woods financial system based mostly on the wants of emergency battle financing whereas minimizing financial disruptions and explains how this steadiness could also be destabilized by unsustainable US debt. Whereas he focuses on the historic and political forces that established the present regime within the paper, he additionally supplies a beneficial place to begin for serious about the long run function and potential penalties of bitcoin within the worldwide financial system.
This text relies on feedback offered on the Satoshi Papers Symposium on the College of Austin (UATX), April 16, 2025.
