This is a clip from The Breakdown newsletter. To read the full editions, Subscribe.
“The dollar will always be the reserve currency. In any case, for a long time.”
– Jerome Powell
When oil prices suddenly quadrupled in 1973, Saudi Arabia was completely unprepared to receive the billions of dollars that began flowing in.
Strictly speaking, the money never actually reached the kingdom: global buyers of Saudi oil sent their payments to accounts at Citibank and JPMorgan in New York — where the money sat idle because Saudi finance officials barely knew how to move it, let alone invest it.
With billions accumulating in non-interest bearing accounts, the Saudi Arabian Monetary Agency (SAMA) reluctantly asked an American banker, David Mulford, to manage it on its behalf.
Mulford and a small team move to the underdeveloped coastal city of Jeddah, where they scramble to secure accommodation in newly built houses in a part of the desert with no roads (to get there, just drive over the sand).
Homes lacked telephones, televisions, mail delivery, and even garbage removal (bankers left their waste in the sand for Bedouin goats to feed on).
The office they moved to six days a week was even worse.
They were allocated one room in a “dilapidated” building, furnished with only chairs and desks – no computers or phones.
“Across the hall from our room was a simple toilet in a long, deep room with an open drain behind it,” Mulford wrote in his book. the biography. “This has been used by our section of the building and is cleaned once a day at 3pm.”
Investment deals were negotiated, agreed upon, and processed via the building’s single telex machine (a type of typewriter/telegraph hybrid) that was constantly in use—one transaction requiring dozens of telex messages and weeks to complete.
However, as Mulford recalls, “We had to invest money at a rate of about $500 million a day just to prevent ourselves from falling behind.”
Mulford’s account of his nine years at the Saudi Arabian Monetary Agency refutes the persistent conspiracy theory that the Saudis invested their oil money in US Treasury bonds as a trade-off for a security guarantee.
Instead, the Saudis invested in US Treasuries because they had to: no other market in the world could absorb the $20 billion per month that the Saudis had to invest.
None of them were safe and easy to invest in, which are important factors when investing via telex.
In fact, the Saudi Arabian Monetary Agency mandated Mulford move 30% of its investment funds outside From the American market. But he struggled to do so.
“In most markets outside the US in those days, a $5 million to $10 million currency trade was enough to move the markets, so there were practical limits on the amount of currency diversification we could achieve,” he explains.
I think this challenges the idea that dollar dominance can be engineered either through coercion or through smart policy: the Saudis chose Treasuries because of what America is doing. He wasNot what he promised or demanded.
Even in the economy of the 1970s—plagued by recession, inflation, and a president who resigned in disgrace—U.S. financial markets retained the depth (volumes of high-quality assets), liquidity (ease of trading those assets), and safety (rule of law) that made them the best choice for the world’s largest investor.
Today the United States owns the best companies, too: non-American investors own shares of approx 19 trillion dollars of US stocks (more than double what they own in Treasuries).
It also has a central bank that maintains its anti-inflation credentials despite political pressure to finance a growing fiscal deficit.
The current head of this central bank, Jerome Powell, basically characteristics The dollar’s dominance over “democratic institutions” and the “rule of law.”
This institutional foundation is central to its attractiveness.
He added: “I believe that the dollar will remain the reserve currency as long as these things remain in place.”
There’s no guarantee it will stay that way forever, of course, and many economists doubt it will stay that way for much longer.
Ken Rogoff, for example, warns The dollar is “eroding at the edges” as foreign investors worry about “the collapse of our institutions,” the unpredictability of policymaking (which could harm foreign capital), and threats to central bank independence.
All of this leads to a “loss of confidence in investing in the United States.”
If so, efforts to manufacture demand for the dollar – for example by promoting stablecoins – are unlikely to help much.
Stablecoins are in demand precisely because dollars are in demand – a dynamic that is unlikely to work in reverse.
If the United States chooses to surrender the dollar’s structural advantages, no amount of industrial demand will save it.
Get news in your inbox. Explore Blockworks newsletters:
