What is the US dollar?

Last night I posted a video titled, “What is the US dollar?” The video was made in response to a request from a subscriber. You can access the video here.

I describe the dollar is a “thing”, a commodity, raw material. The dollar is a derivative on the economy. As a thing that can be sold and purchased in money markets, its value is based on how well the US economy is doing. As the US output increases, so too does the demand for the US dollar.

A growing gross domestic product is an indicator on how the overall economy is faring. A growing economy signals income opportunities for investors and incentivizes investors to buy dollars which can then be used to buy US bonds, stocks, real estate, or other businesses.

The US dollar is also what I term as a national unifier. Over a hundred years ago, banks issued their own bank notes which made interstate commerce difficult. Using a bank note issued by Bank X in Wichita would be cumbersome for a merchant to accept in Denver where the merchant’s bank would only accept its notes for deposit.

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In addition, determining the value of federal taxes collected would be difficult for the federal government. For the purpose of eliminating the value determination problem, it is optimal for the federal government to designate a single currency for the efficient collection of federal taxes across states. This single currency approach, in my opinion, aids the enforcement of Amendment XVI of the US Constitution which reads:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The takeaway is that the US dollar is the creation of the US government with four attributes:

1. It is a commodity, a “thing” that can be bought and sold;
2. Its value is derived from the performance of the underlying economy;
3. It circulates through the political economy as a national unifier; and
4. It is used to settle federal income tax obligations.

There has been a lot of chatter over the last year about the dollar losing its dominance as a world reserve currency. I believe that the dollar will not lose that dominance overnight. The bulk of its trading partners are in the Euro Zone and North America. I have no doubt that nations like France and Germany will try to maintain close ties with the United States and any China-Russia currency bloc that may ensue from the attempts of emerging markets to develop their own currency.

The US ability to remain globally influential will depend on how the government manages the political economy. Governing into the 21st century will depend on how well the federal government nationalizes its political economy, especially its banking system. The US will compete against one or maybe two blocs that stress centralized cultural identities. The US government will have to bring back manufacturing to US shores and craft a unifying narrative of “America First” in order to generate the energy necessary for competing against distinct European and Asian blocs.

Not only is the question, “What is the US dollar?”, but “How does government sustain the US dollar?”

Alton Drew

16 April 2023

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