The world runs on the U.S. dollar. From Washington to Beijing, governments, businesses, and individuals rely on the dollar to conduct commerce and invest profitably and safely—even after the global financial meltdown in 2008 revealed the potentially catastrophic cost of the dollar's hegemony. But how did the greenback achieve this planetary dominance a mere century and a half after President Lincoln issued the first currency backed only by the credit—and credibility—of the federal government?
In Greenback Planet, acclaimed historian H. W. Brands charts the dollar's astonishing rise to become the world's principal currency. Telling the story with the verve of a novelist, he recounts key episodes in U.S. monetary history, from the Civil War debate over fiat money (greenbacks) to the recent worldwide financial crisis. Brands explores the dollar's changing relations to gold and silver and to other currencies and cogently explains how America's economic might made the dollar the fundamental standard of value in world finance. He vividly describes the 1869 Black Friday attempt to corner the gold market, banker J. P. Morgan's bailout of the U.S. treasury, the creation of the Federal Reserve, and President Franklin Roosevelt's handling of the bank panic of 1933. Brands shows how lessons learned (and not learned) in the Great Depression have influenced subsequent U.S. monetary policy, and how the dollar's dominance helped transform economies in countries ranging from Germany and Japan after World War II to Russia and China today. He concludes with a sobering dissection of the 2008 world financial debacle, which exposed the power—and the enormous risks—of the dollar's worldwide reign.
On January 1, 1863, Abraham Lincoln signed the Emancipation Proclamation, freeing most of America's slaves. On March 3 of that year, he signed a revision of the Legal Tender Act, freeing the American dollar from its dependence on gold and silver. The first measure marked the demise of the system of political economy Americans had inherited from colonial days; the second signaled the launch of American capitalism toward global dominance.
The dollar had been America's official currency for decades, but it had always been chained to precious metal; by creating fiat money, backed only by the credit and credibility of the federal government, Lincoln made possible innovations in finance unimagined by previous generations. Some of these innovations would be felt at once, as the greenback financed the Union victory in the Civil War and accelerated America's industrial revolution. Other innovations would take longer, not least since stubborn tradition distrusted nonconvertible currency and continued to demand gold. Tradition compromised with innovation in the 1913 establishment of the Federal Reserve system, which allowed the government to fine-tune the nation's money supply.
The tuners, however, hit some bad notes, and when the stock market crashed in 1929 the Fed failed to provide liquidity to prevent the stock swoon from spilling over into the broader economy. Dollars disappeared and prices plunged, until Franklin Roosevelt, in defiance of respectable opinion and international comity, did what the Fed couldn't and devalued the dollar. Roosevelt's isolationist monetary policy may have contributed to the coming of World War II, which had the paradoxical considering its origins effect of catapulting the United States to global military, political and financial leadership.
The dominion of the dollar, institutionalized at the Bretton Woods conference of 1944, served America well for two decades, but it was an inevitably wasting asset. Under the aegis of the dollar, the economies of Germany and Japan revived and eroded America's hegemony. By the early 1970s the Bretton Woods system had become unsustainable. Richard Nixon shocked the diplomatic world by going to China, but his jolt to the financial world by ending the convertibility of the dollar to gold had more sweeping and protracted effects. The dollar became merely the first among currency equals, floating like them on a sea of constantly changing worries and expectations.
Yet Nixon's forced-hand coup turned out to be a stroke of inadvertent genius. Medieval alchemists had long sought to turn lead into gold; the American president accomplished something more miraculous: turning paper to gold. By detaching the dollar from gold, Nixon made the greenback the fundamental standard of value in world finance. Other currencies could rise against the dollar, but the dollar's ubiquity, its ready convertibility into other currencies and its backing by what remained the most powerful economy on earth gave the dollar greater clout than ever in the markets of the world.
This became apparent almost at once, when the oil crises of the 1970s sent energy prices soaring. Americans paid the higher bills along with everyone else, but unlike everyone else they paid in their own currency. The "petrodollars" amassed by OPEC returned to America to finance a swelling federal deficit and the still-rising American standard of living. And when inflation in the United States hit record levels, it silently recaptured for Americans part of the oil price surge.
Events of the following decades reinforced the dollar's dominance. The collapse of communism left the American model of democratic capitalism as the only system most countries cared to emulate. The revolution in communications technology underpinned a globalization that sent dollars rocketing around the world at the speed of electrons. No single currency commanded the official allegiance of the entire planet, but the dollar came closer than any currency ever had.
Americans benefited from the dollar's reign, and so did the world as long as markets rose and investment smiled. The 1990s were, by most measures, the best decade in world economic history. But when, several years into the new millennium, an international bubble in real estate burst, and when banks on six continents found themselves holding one another's bad debt, denominated mostly in dollars, the costs of the greenback's hegemony became apparent. Financial miscues that once had been confined to local or regional markets now roared around the planet like tsunamis, swamping individuals, firms and countries almost without warning. Credit markets crashed; otherwise healthy businesses found themselves bereft of the means to carry on. Hundreds of millions of people planet-wide lost their jobs. Countries with the largest dollar holdings China most conspicuously sought the safety of currency diversification but discovered that their efforts to diminish the danger risked making it worse.
After a harrowing year, the crisis eased. Financial markets regained a modicum of stability; the dollar emerged almost as essential as ever. But no serious observer believed that the danger had vanished. The next tremor might trigger another tsunami, producing even greater damage than before.