Aug 31, 2017
How the Dollar Stays Dominant
American currency has retained its value and the trust of the public. Will the President change that?
The factory that makes the paper for U.S. currency smells like a clean barn just supplied with fresh hay. Built in the eighteen-seventies, in Dalton, Massachusetts, it runs today, as it did then, on the power of the adjacent Housatonic River. The scent emanates from the centerpiece of the mill, a giant, elevated iron sphere larger than a house. Tons of raw cotton and linen are poured in at the top, along with water, and the sphere is heated and spun like a washing machine to break up the fibres, which are run through the paper-making machinery at another, slightly younger plant down the road.
It's in that plant that this nineteenth-century product is outfitted with the latest technology. The hundred-dollar bill, for example, is embedded with a micro-optic security ribbon—a blue line, next to Benjamin Franklin's face, patterned with alternating images of the Liberty Bell and the number "100" which, when the bill is tilted, move up and down, left and right. The effect comes from more than a million microscopic lenses, each sitting atop a precisely printed image thinner than a human hair. Crane Currency, the company that has produced the paper for our currency for almost a hundred and forty years, now makes bills for dozens of other countries, and has created even smaller lenses with even more remarkable effects. One bill, when slanted, appears to have a large drop of water slowly moving down its face. Tod Niedeck, the head of marketing for Crane, says that he was inspired by the "Harry Potter" films, in which enchanted photographs come to life, and believes that in the near future Crane will be able to create bills with more complex animation: George Washington walking to a chair and sitting down, Franklin winking and waving.
The official reason for all this modern technology is that it makes the currency hard to counterfeit, but that explanation isn't quite sufficient. In reality, there has never been much counterfeiting in the U.S. Last year was typical: about sixty-four million dollars' worth of counterfeit currency was seized by the Secret Service, nearly half of which came from one operation in Peru. There is more than a trillion dollars' worth of paper currency in circulation, which means that, in any given year, counterfeit bills represent five one-thousandths of one per cent of the total.
Larry Felix, the former director of the Bureau of Engraving and Printing, told me that anti-counterfeit measures "don't make much sense from a direct financial perspective," since the cost of preventing counterfeiting is much greater than the infinitesimal loss caused by fake bills. But these measures have a broader, psychological purpose. "Banknotes depend on confidence," Felix told me. (Our paper bills are called banknotes because they are, technically, promissory notes—formal I.O.U.s—issued by the Federal Reserve.) "You accept a banknote because you figure the person you will hand it to will also accept it." This is the essential circular mystery of money: its value comes from each of us believing that everybody else will continue to believe in its value. The physical bill reinforces this bit of theatre, with the feel of the cotton-and-linen paper reminding us that dollars are long-trusted, and the ever-upgraded magical effects reassuring us that they will hold value far into the future.
This basic faith in currency has collapsed in other countries, most famously in Weimar Germany and, more recently, in Zimbabwe, Iraq, and Brazil. (The Hungarian pengö suffered the worst known currency collapse to date, going from an exchange rate of thirty-three to the U.S. dollar in 1944 to four hundred and sixty septillion—a trillion times a trillion—to the dollar two years later.) The dollar, however, has been remarkably resilient. A decade ago, there was serious discussion of the euro or the Chinese renminbi becoming the central global currency. Then there was a great recession caused, in large part, by the failures of the American financial system. This coincided with advances in digital-payment systems, such as bitcoin and Apple Pay, and the proliferation of cell-phone payments in the developing world. Yet the dollar emerged dominant, showing that a currency doesn't have to be great to be trusted—it just has to be the least bad. (Wall Street traders refer to the dollar as "the cleanest dirty shirt.") Today, more than half of U.S. banknotes, including the vast majority of hundred-dollar bills, are held outside the country, acting as a store of value more dependable than local currencies and as an extension of American influence.
This year, many U.S. institutions have come under attack by a President who doesn't seem to understand their nature or their importance. So far, our currency has been spared, its value protected by the Federal Reserve Board, which has remained outside the general madness. In the coming year, though, President Trump could replace Janet Yellen and Stanley Fischer, the highly respected chair and vice-chair of the Fed, with new appointees. It's not hard to imagine Trump installing unqualified toadies, people who might inflate or deflate the dollar to achieve political goals. Gary Cohn, Trump's chief economic adviser and, reportedly, the top candidate for the chair, represents so much that is odious about the Administration: the former president of Goldman Sachs, he blatantly favors the interests of banks and of the wealthy. Cohn does have one crucial qualification, however. He recognizes that reckless policies could undermine confidence in the dollar, creating wreckage that would far outlast this Administration.
The New Yorker