Hendrickson argues that the "Treasury Standard" represents the culmination of a historical evolution where states monopolized currency issuance to finance increasingly costly wars, tracing this...
Hendrickson argues that the "Treasury Standard" represents the culmination of a historical evolution where states monopolized currency issuance to finance increasingly costly wars, tracing this development back to the Military Revolution of 1500-1800. This monopoly on money was crucial for emergency war financing, necessitating the suppression of competing currencies to safeguard this capability. To ensure the long-term viability of this system, states were compelled to commit to price stability to sustain demand for their currency.
As the centuries progressed, innovations such as banking began to erode the state's capacity to finance wars through currency debasement. This led to the rise of central banks as a novel means of funding conflict, with the Bank of England introducing a pivotal tactic: halting the convertibility of paper money into gold during wars, while pledging to restore the conversion rate to pre-war levels afterwards. This strategy maintained stable currency demand and significantly expanded war financing capabilities. However, the failure of the interwar gold standard revealed the limitations of this method.
The Bretton Woods system attempted to resolve these issues by linking the dollar and gold, but it could not withstand the fiscal demands of American foreign policy. As a result, the Treasury Standard emerged, positioning US debt as the central element of the system.
Currently, a relentless global appetite for "safe and liquid" US assets facilitates the government's ability to fund military expenditures through debt expansion. The dominance of the dollar further empowers the United States to wield sanctions effectively. However, this system encourages the US to accumulate excessive debt to satisfy global reserve demands, rendering it increasingly precarious. Additionally, the overuse of sanctions might prompt nations with trade surpluses, potentially adversarial to the US, to reduce their reliance on USD assets.
This fragility of the Treasury Standard, exacerbated by US fiscal and foreign policies, poses significant risks, particularly in light of its vulnerability to geopolitical shocks.
It's true that governments have come up with many innovative forms of financing to pay for wars and there are many interesting examples in history. (Paper money during the US Civil War is another...
It's true that governments have come up with many innovative forms of financing to pay for wars and there are many interesting examples in history. (Paper money during the US Civil War is another example.)
But I think this article emphasizes monetary concerns too much versus the connections to fundamental sources of wealth. It also doesn't make enough distinctions between different periods of history. In ancient times, the basis of wealth was agriculture, and in modern times, it's industry. (For example, a big factor in the dominance of US industry during and after World War II was not being bombed.)
Oil is another basis of wealth. Convincing oil-producing countries to buy US treasuries was a good trick, ensuring demand for US dollars. (I'm not sure what the author means by "path dependence," though. Isn't history always path-dependent? The specifics of how a particular path gets taken are what history is all about.)
In general, valuations are based on predictions of future wealth and less on currently-existing wealth. A factory is valuable because it will be useful to producing goods that will hopefully sell well. If the buyers stop buying and the goods can't be sold, it's far less valuable as scrap. Trade sanctions could have a similar effect. So wealth is sensitive to market sentiment about risks.
For a government, the basis of wealth is being able to claim a share of production. In ancient times it could simply be taken as loot. In modern times, this is government spending. Taxes ensure demand for money, which makes government spending effective. The wealthier the country is, the more the government can spend.
The future isn't known to us and the US might not be as wealthy as it currently expects to be. I think it's still going to be pretty wealthy, though? Trade sanctions show that being inside the global trading system is much better than being outside it, and the US still plays a central role. Countries might want to reduce dependency on global trade, but that's difficult because it makes them poorer.
Regarding the connection to military financing, I think it's often the reason for emergency funding, but military spending isn't special and it's not necessarily connected to trade balances.
We could look at how World War II was financed. According to Wikipedia, the Lend-Lease act resulted in $50 billion in military supplies being shipped from the US to other countries, of which only $8 billion of which was repaid. What was this backed by? Nothing. No finance needed. This is closer to a gift than a trade.
We saw this more recently with a new lend-lease act to support Ukraine. The countries sending arms to Ukraine aren't expecting to get paid back.
Of course, the US government has to pay defense contractors, but military spending isn't different from other kinds of spending as far as government finance is concerned.
Hendrickson argues that the "Treasury Standard" represents the culmination of a historical evolution where states monopolized currency issuance to finance increasingly costly wars, tracing this development back to the Military Revolution of 1500-1800. This monopoly on money was crucial for emergency war financing, necessitating the suppression of competing currencies to safeguard this capability. To ensure the long-term viability of this system, states were compelled to commit to price stability to sustain demand for their currency.
As the centuries progressed, innovations such as banking began to erode the state's capacity to finance wars through currency debasement. This led to the rise of central banks as a novel means of funding conflict, with the Bank of England introducing a pivotal tactic: halting the convertibility of paper money into gold during wars, while pledging to restore the conversion rate to pre-war levels afterwards. This strategy maintained stable currency demand and significantly expanded war financing capabilities. However, the failure of the interwar gold standard revealed the limitations of this method.
The Bretton Woods system attempted to resolve these issues by linking the dollar and gold, but it could not withstand the fiscal demands of American foreign policy. As a result, the Treasury Standard emerged, positioning US debt as the central element of the system.
Currently, a relentless global appetite for "safe and liquid" US assets facilitates the government's ability to fund military expenditures through debt expansion. The dominance of the dollar further empowers the United States to wield sanctions effectively. However, this system encourages the US to accumulate excessive debt to satisfy global reserve demands, rendering it increasingly precarious. Additionally, the overuse of sanctions might prompt nations with trade surpluses, potentially adversarial to the US, to reduce their reliance on USD assets.
This fragility of the Treasury Standard, exacerbated by US fiscal and foreign policies, poses significant risks, particularly in light of its vulnerability to geopolitical shocks.
It's true that governments have come up with many innovative forms of financing to pay for wars and there are many interesting examples in history. (Paper money during the US Civil War is another example.)
But I think this article emphasizes monetary concerns too much versus the connections to fundamental sources of wealth. It also doesn't make enough distinctions between different periods of history. In ancient times, the basis of wealth was agriculture, and in modern times, it's industry. (For example, a big factor in the dominance of US industry during and after World War II was not being bombed.)
Oil is another basis of wealth. Convincing oil-producing countries to buy US treasuries was a good trick, ensuring demand for US dollars. (I'm not sure what the author means by "path dependence," though. Isn't history always path-dependent? The specifics of how a particular path gets taken are what history is all about.)
In general, valuations are based on predictions of future wealth and less on currently-existing wealth. A factory is valuable because it will be useful to producing goods that will hopefully sell well. If the buyers stop buying and the goods can't be sold, it's far less valuable as scrap. Trade sanctions could have a similar effect. So wealth is sensitive to market sentiment about risks.
For a government, the basis of wealth is being able to claim a share of production. In ancient times it could simply be taken as loot. In modern times, this is government spending. Taxes ensure demand for money, which makes government spending effective. The wealthier the country is, the more the government can spend.
The future isn't known to us and the US might not be as wealthy as it currently expects to be. I think it's still going to be pretty wealthy, though? Trade sanctions show that being inside the global trading system is much better than being outside it, and the US still plays a central role. Countries might want to reduce dependency on global trade, but that's difficult because it makes them poorer.
Regarding the connection to military financing, I think it's often the reason for emergency funding, but military spending isn't special and it's not necessarily connected to trade balances.
We could look at how World War II was financed. According to Wikipedia, the Lend-Lease act resulted in $50 billion in military supplies being shipped from the US to other countries, of which only $8 billion of which was repaid. What was this backed by? Nothing. No finance needed. This is closer to a gift than a trade.
We saw this more recently with a new lend-lease act to support Ukraine. The countries sending arms to Ukraine aren't expecting to get paid back.
Of course, the US government has to pay defense contractors, but military spending isn't different from other kinds of spending as far as government finance is concerned.