Barry Eichengreen: The US dollar shows early signs of decline, central banks are diversifying away from Treasuries, and DeFi yields lag behind institutional returns

Key takeaways

• The US dollar is showing early signs of decline as a global currency.
• Central banks are diversifying reserves away from US Treasury securities.
• DeFi investors are currently experiencing lower yields compared to institutional investors.
• Institutional investors are benefiting from sovereign-backed yields up to 50%.
• Historical currency dynamics reveal the influence of perceived value on circulation.
• Spanish pieces of eight were dominant in early America due to a lack of local minting.
• Spanish silver was the first true global currency due to its wide acceptance.
• Gresham’s law explains how bad money drives out good in currency circulation.
• The Spanish crown ensured the quality of minted coins through centralized control.
• The division of coins into smaller pieces was a convention, not a decree.
• The Byzantine Empire’s fiscal prudence maintained currency stability.
• A currency’s international longevity is linked to fiscal prudence and economic strength.
• International currencies emerge from economic strength and trade relationships.

Guest intro

Barry Eichengreen is the George C. Pardee and Helen N. Pardee Chair and Distinguished Professor of Economics and Political Science at the University of California, Berkeley, where he has taught since 1987. His best-known work, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939, established him as a leading authority on how international monetary systems shape economic crises and currency dominance. He served as Senior Policy Advisor at the International Monetary Fund in 1997–98 and has written extensively on the history of reserve currencies, financial crises, and the conditions that determine whether currencies rise, endure, or decline.

The decline of the US dollar as a global currency

• The dollar is beginning to decline as a global currency.

• I think we are seeing the beginnings of the decline of the dollar as a global currency

  — Barry Eichengreen

• Central banks are moving out of dollar US Treasury securities into gold and other nontraditional reserve currencies.
• This shift is part of a strategy to hedge against potential risks.
• The geopolitical and economic climate is influencing currency reserves.
• The decline is not immediate but indicates a long-term trend.
• The dollar’s dominance is being challenged by emerging market dynamics.
• This trend reflects a broader diversification in global currency reserves.

Disparities in yield opportunities between DeFi and traditional finance

• DeFi investors earn significantly lower yields compared to institutional investors.

• While DeFi investors earn three to 6% on stablecoins and T-bills, institutions have been harvesting 10 to 50 yields

  — Barry Eichengreen

• Institutional yields are backed by sovereign monetary policy.
• This highlights a critical disparity in yield opportunities.
• The potential for DeFi to evolve and offer competitive yields exists.
• Emerging markets play a role in these yield differences.
• Understanding these disparities is crucial for DeFi’s growth.
• The current yield environment reflects broader financial market trends.

Historical dominance of Spanish pieces of eight

• Spanish pieces of eight became the dominant currency in early America.

• The 13 colonies before the US gained its independence were prohibited by the Brits from operating a mint

  — Barry Eichengreen

• The availability of high-value silver coins from Spanish colonies facilitated this dominance.
• Economic conditions in the colonies led to reliance on Spanish silver.
• This currency choice was driven by practicality and necessity.
• Spanish silver coins were widely accepted and circulated.
• The lack of local minting options influenced currency use.
• This historical context provides insight into early American economic dynamics.

Spanish silver as the first global currency

• Spanish silver became the first true global currency.

• Spanish silver basically encircled the world… it was in a sense the first true global currency.

  — Barry Eichengreen

• Its widespread acceptance and circulation were key factors.
• Trade routes and currency systems in the 16th and 17th centuries facilitated this.
• The global reach of Spanish silver set a precedent for modern currencies.
• This historical insight highlights the significance of Spanish silver in trade.
• The role of Spanish silver in global commerce was unprecedented.
• Understanding this history is crucial for grasping the evolution of global currencies.

Gresham’s law and currency circulation

• Gresham’s law illustrates how bad money drives out good.

• There’s a lot we talk about on bankless often which is Gresham’s law… bad money drives out good.

  — Barry Eichengreen

• This principle influences currency circulation and valuation.
• Perceived value plays a critical role in currency dynamics.
• Understanding Gresham’s law is essential for economic theory.
• This law connects historical currency dynamics to modern finance.
• The implications of Gresham’s law are evident in current financial systems.
• Currency valuation is influenced by both historical and contemporary factors.

Centralized control of Spanish coin minting

• The Spanish crown maintained centralized control over coin minting.

• The Spanish crown would appoint or sell the right to be the equivalent of the mint master

  — Barry Eichengreen

• This system ensured the quality and purity of minted coins.
• Centralized control was crucial for maintaining currency standards.
• This historical context is important for understanding monetary systems.
• The regulation of coin minting influenced currency stability.
• The Spanish Empire’s approach set a standard for currency quality.
• This insight highlights the importance of centralized monetary control.

Informal conventions in currency division

• The division of coins into smaller pieces became a convention.

• It became a convention… it created all the problems that you allude to

  — Barry Eichengreen

• This was not a top-down decree but an accepted practice.
• The division of currency posed challenges in equivalency.
• Informal mechanisms played a role in historical monetary systems.
• Understanding these conventions is crucial for historical currency analysis.
• The complexities of currency division reflect broader economic dynamics.
• This insight provides a nuanced view of historical monetary practices.

Fiscal prudence in the Byzantine Empire

• The Byzantine Empire maintained fiscal prudence, avoiding currency debasement.

• The Byzantine Empire was characterized by fiscal prudence… it basically lived within its budgetary means.

  — Barry Eichengreen

• Despite external pressures, the empire maintained currency stability.
• Fiscal discipline was key to the empire’s economic policies.
• Understanding this history is crucial for analyzing currency stability.
• The Byzantine Empire’s approach offers lessons for modern finance.
• This insight highlights the importance of fiscal prudence in currency management.
• The empire’s financial discipline contributed to its longevity and stability.

Longevity of international currencies

• A currency’s longevity is tied to fiscal prudence and economic prowess.

• If you want to have a currency that persists throughout the centuries, fiscal prudence is an imperative.

  — Barry Eichengreen

• Economic strength is crucial for maintaining international currency status.
• The historical management of currencies offers lessons for modern finance.
• Understanding these factors is key to analyzing global currency dynamics.
• The Roman denarius serves as a cautionary tale of currency debasement.
• This insight connects historical currency management to modern implications.
• Fiscal and economic strength are critical for currency longevity.

Emergence of international currencies

• International currencies emerge from economic strength and trade relationships.

• The first familiar set of preconditions has to do with commercial economic commercial and financial prowess.

  — Barry Eichengreen

• Trade dynamics influence currency adoption and usage globally.
• Economic and financial prowess are key to international currency status.
• Understanding these factors is crucial for analyzing global finance.
• The role of trade in currency emergence is significant.
• This insight highlights the essential preconditions for international currency status.
• The combination of economic strength and trade relationships is vital for currency dominance.