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“Trust is one of the greatest economic forces on Earth.”
— Charlie Munger
What money will the world trust next?
The Spanish dollar (a.k.a. pieces of eight, a.k.a. Spanish peso) was the first global currency.
From the 16th through 19th centuries, silver coins minted by the Spanish government circulated on all six of the world’s inhabited continents, and were legal tender on five of them (parts of Europe, Africa, Asia, and both Americas).
In many of those places, they were so welcome you could even cut them into halves, quarters, or eighths and spend the pieces as change (hence the name “pieces of eight” for a whole coin).
The Spanish dollar wasn’t quite a global reserve currency, but that’s only because central banks didn’t yet hold reserves.
But it served as a store-of-value reserve for private savers around the world — and that makes today’s US dollar the institutionalized, fiat-era successor of the Spanish dollar.
Both global currencies served the same function: to reduce friction in international trade by providing a near-universal medium of exchange, unit of account, and store of value.
Today’s global reserve currency pays homage to its predecessor in both name and symbol — the “$” dollar sign is thought to have evolved from the mark for the Spanish currency (the dollar sign is still also called “the peso sign” for that reason).
But the debt goes deeper.
The first US dollar, established as the basic currency unit of the United States in 1792, was a silver coin deliberately designed to have roughly the same metallic content as a Spanish dollar: ~24 grams of pure silver (plus about two grams of copper to make it more durable).
The US government did not mint nearly enough of them to go around, however, so Spanish dollars continued to circulate widely alongside US dollars — the two dollars were treated as interchangeable in daily transactions for many years, with the Spanish dollar even remaining legal currency in the US until 1857.
That was natural enough, since both dollars had the same metallic content.
But the lesson of the Spanish dollar is that it wasn’t just about the metal.
Instead, the Spanish dollar became the first world currency because people trusted its issuer.
Dozens of countries issued silver coins in the 17th century, but the Spanish dollar found favor because it came from highly standardized royal mints in the Spanish colonies — and because it was backed by a powerful empire that enforced quality control and valued the integrity of its currency.
People didn’t weigh every Spanish dollar they received, for example, or inspect its purity — if it came from a Spanish mint, they trusted that it had both the quantity and the quality of silver that the Spanish government said it did.
After Latin American countries won independence, however, Spain lost control of the silver mines and nearby minting facilities that had supplied the world with Spanish currency.
The newly independent countries of Latin America continued to mint nearly identical silver dollars — but political instability led to inconsistent minting, intentional debasement, and even counterfeiting at poorly supervised provincial mints.
Partly as a result, merchants and bankers around the world began favoring money from more reliable issuers like Britain and the US — not because they had more silver, but because they had more trust.
There’s a lesson in that.
The British pound sterling became the next global currency, backed by its convertibility into gold and also the trust in British institutions — you couldn’t melt down a pound note, but people trusted the Bank of England to exchange it for about 7.3 grams of gold on demand.
But global currencies came to be valued for more than their metal — trust in a government’s credit, a central bank’s stability, and the liquidity of its financial markets soon became equally as important.
In the 19th century, the British pound sterling — backed by gold, sensible British governance, and London’s advanced banking system — overtook the Spanish dollar as the preferred medium for large-scale finance and reserves.
The next global currency, of course, did away with the metallic backing altogether: the US dollar is backed only by our faith in the Federal Reserve, the US government, and US financial markets.
But maybe not for long.
The US still has the world’s largest economy, deepest financial markets, and strongest property rights — but erratic government policy and heated rhetoric is making people question how much they should trust the US dollar.
So much so that many are rethinking where to place their trust next.
Ken Rogoff thinks it could be China’s renminbi.
“There are a lot of countries,” he told the Monetary Matters podcast, that “don’t trust the United States. They would just rather deal with China. They understand China’s business, they know what China wants … They’d rather China had [their information] than Donald Trump.”
The consequence, he says, is that you might soon find yourself in “some African city” that used to love US dollars and “you’ll pull out your dollars and they’ll go, ‘What are those? Where are the renminbi?’”
That will be quite a change.
Others think the change will be even bigger — that the next global currency won’t be issued by a government at all: Bitcoin is a “trustless” form of money that many believe will transcend the trust issues that undid the Spanish dollar and British pound, and now bedevil the US dollar.
It would make for a natural evolution: Spain was trusted to mint silver money > the US was trusted to issue fiat money > bitcoin will be trusted to create magic internet money.
It would still have to be trusted, though, because “blockchain applications are never fully trustless,” as Vitalik once commented in a blog post.
