by Simon Black, Sovereign Man:
By the summer of 1497, Ferdinand and Isabella of Spain were presiding over a rapidly growing empire.
Christopher Columbus had already claimed most of the Caribbean islands on their behalf. Plus Pope Julius II had awarded virtually all of the western hemisphere to Spain in the infamous Treaty of Tordesillas.
Spain was quickly on its way to becoming a global superpower. Ferdinand and Isabella knew it, and they realized that they needed a strong currency to match their strong empire.
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So on June 13, 1497, they announced a major monetary reform called the Medina del Campo, named for the site of a popular medieval banking conference at the time.
The monetary reform was sweeping; they abolished most other coins in their domain, and re-established the real as the primary currency across Spanish lands.
The real was a silver coin, weighing about 0.1 troy ounces or roughly 3.2 grams. And coins were minted in denominations of ½, 1, 2, 4, and 8 real.
Over time, the 8-real coin (real de ocho) became the most popular; it was known as a “Piece of 8”, and eventually the “Spanish dollar”.
By the mid-1500s under King Charles I of Spain, the Spanish dollar had become the world’s primary reserve currency. From the Americas to Europe to Asia, global trade and commerce were quoted and often settled in Spanish dollars.
Dutch and Portuguese traders visiting Macau in the 1600s, for example, would frequently buy goods from Chinese merchants using Spanish dollars.
In 1704, Queen Anne of Great Britain decreed that the Spanish dollar would be legal tender in the American colonies. And in 1792, the newly independent United States passed the Coinage Act which defined the US dollar as equivalent to the Spanish dollar.
The Spanish dollar’s dominance in global finance was unparalleled. But like all reserve currencies that came before, it too lost its luster.
Eventually the Spanish Empire’s strength faded. The government defaulted on its debts, confiscated private wealth, and suffered embarrassing military defeats.
The Dutch guilder then began to displace the Spanish dollar in commerce and trade. And by the late 1800s, the British pound had become the world’s dominant reserve currency — matching the British Empire’s unparalleled size and economic power.
This lasted until the mid-20th century when, after World War II, the United States dollar became the world’s primary reserve currency — a status the dollar has enjoyed for decades.
Having the world’s reserve currency is an extraordinary privilege. It means that the rest of the world literally HAS to stockpile your currency.
For example, whenever a company in Peru does business with a supplier in Malaysia, that transaction is quoted and settled in US dollars. This means that the banking systems in both Peru and Malaysia HAVE to maintain substantial holdings of US dollars in order to facilitate these transactions.
This is the biggest reason why foreigners own trillions and trillions of dollars of US government bonds; bonds are the largest and most liquid financial instrument available for foreign investors who need to hold dollars.
And because of this need for foreigners to own US dollar assets, foreigners own a whopping $7.5 trillion worth of US government bonds, roughly 25% of the national debt.
This is really an enormous benefit for the US. And for an easy example, we need look no further than to the United Kingdom.
The British pound was the world’s dominant reserve currency more than a century ago. Today the UK is still a significant economy. But they no longer have the unique reserve currency advantage.
Now, you may be aware that, a few weeks ago, the British pound and British government bonds (known as gilts) began plummeting after the British government announced a series of tax cuts and economic reforms.
It turned out that the bond market wasn’t thrilled with the plan, so investors began dumping their British gilts and pounds.
It was a full blown panic. And soon, the central bank had to step in to bail out the bond market. The Chancellor was sacked. And the Prime Minister canceled her planned tax cut.
Essentially the British government had to capitulate to the demands of investors.
