This is an excerpt from The Breakdown newspaper. To read the full article, register.
“The dollar will always be a reserve currency. For a long time, anyway.”
– Jerome Powell
When the price of oil quadrupled in 1973, Saudi Arabia was completely unprepared for the billions of dollars that began to flow.
In fact, the money never made it to the Kingdom: Saudi oil buyers around the world sent their payments to accounts at Citibank and JPMorgan in New York – where the money was useless because Saudi financial officials did not know how to transfer it, let alone deposit it.
With billions piling up in interest-free accounts, the Saudi Arabian Monetary Agency (SAMA) reluctantly asked an American banker, David Mulford, to oversee them.
Mulford and a small group moved to the undeveloped port city of Jeddah where they were forced to find accommodation in newly built buildings in a desert area with no roads (to get there, you had to drive through the sand).
The buildings did not have telephones, televisions, mail and even garbage disposal (banks left their garbage in the sand for the Bedouin goats to eat).
The office he went to six days a week was very bad.
They were given a single room in a “wet” building, with only chairs and desks—no computers or telephones.
“Across the hall from our bedroom a simple toilet was placed in a long, deep room with an open drain behind it,” Mulford wrote in his statement. the history of his life. “This house was used by our section of the house and they ran it once a day at 3 o’clock in the afternoon.”
Financial transactions were negotiated, agreed and exchanged through a single telex machine (a type of hybrid press/telegraph machine) that was used continuously – one contract required several telex messages and several weeks to complete.
And yet, as Mulford recalls, “we had to invest at the rate of about $500 million a day just to protect ourselves from falling behind.”
Mulford’s nine-year history at SAMA contradicts the persistent conspiracy theory that the Saudis put their oil money in US Treasurys as a quid pro quo to ensure security.
Instead, the Saudis invested in US Treasurys because they had to: There is no other market in the world that can take the $20 billion a month that the Saudis have to invest in.
And nothing was safer and easier to invest in – the essentials of investing are the telex.
SAMA commissioned Mulford to move 30% of their sales revenue outside for the US market. But he struggled to do it.
“In most markets outside of the United States in those days, a $5-10 million dollar transaction was enough to move the market,” he explains, “so there was a limit to the amount of money we could get.”
This, I think, refutes the idea that control of the dollar can be created through coercion or strategic policy: the Saudis chose Treasurys because of what the Americans he wasnot what it promised or wanted.
Even in the 1970s economy – plagued by recession and inflation and a president who resigned in disgrace – the US financial markets maintained the depth (abundance of high quality products), liquidity (easiness to sell the products) and security (law enforcement) which made it the best option for the world’s largest representative.
Today, the US has the best companies, too: Non-US suppliers have a lot of money $19 trillion of US equities (more than double their holdings in Treasurys).
It also has a central bank that has maintained its anti-inflation policy despite pressure from politicians to hand over ever-increasing interest rates.
The current head of the central bank, Jerome Powell, in particular values dollar control to “democratic institutions” and “rule of law.”
The foundation of that organization is crucial to its appeal.
“I think the dollar is going to be the reserve currency when those things are there,” he added.
There’s no guarantee they’ll be around forever, of course — and many economists doubt they’ll be around much longer.
For example, Ken Rogoff, he warns that the dollar is “destroying the margins” as foreign investors complain about the “destruction of our institutions,” making unpredictable policies (which would destroy foreign currencies), and threatening the independence of the central bank.
All of this adds up to a “loss of confidence in investing in the United States.”
If so, efforts to create demand for the dollar – through, say, promoting stablecoins – will not help much.
Stablecoins are needed precisely because the dollar is needed – a force that is unlikely to change.
If the US decides to give up its advantages on the dollar, no amount of production will save it.
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