Destroying the dollar

Question

Let's destroy the USD dollar: I am the government of a small, economically and geopolitically unimportant country that has its own currency and a local central bank. I order the local central bank (at gun point, if need be) to lend me dollars. Is there a technical problem to do this? No, this is just an exchange of papers and electronic messages -we can write on them anything we want, especially with a gun in our head. We can attach to these electronic records any three-letter code we want, so why not "USD"?

Now I have a bank account with a balance of gazillions and gazillions of dollars- and USD ones, the heavy stuff.

I can pay off my public debt, make every citizen rich (or just those that I like), import all the luxuries in the world, buy as much energy as I want, whatever. After all, I will be paying in USD dollars right? I will be wire-transferring from a bank account, an electronic signal that will contain some digits and the code "USD" attached.

So let's hear it from the experts: what kind of checks has the international community in place in order to effectively avoid such a situation?

And what if, as the most long-lasting counterfeiters know, we were to do this modestly, just a little at the time to help a tad with the local government budget, but without "showing-off riches" to the rest of the world??

Answer 1

I think you misunderstand what "electronic money" is - moving electronic money around isn't simply a matter of sending the right "codes" - it is ultimately about asking the central bank of that currency to move money around.

Sure you can open up excel and write in it "I have \$100" but that isn't USD, much as writing \$100 on a piece of paper doesn't make it a \$100 bill.

In order to lend you dollars I actually have to have some dollars to lend you. That means I need a reserve account with one of the 12 Federal Reserve banks. There are no electronic USD that are not ultimately in a Federal Reserve Account.

The "ultimately" in that sentence is there because banks can (and do) form hierarchies. Only the largest ("Tier 1" banks, sometimes called "clearing banks") actually have a reserve account with the central bank in a given currency. Other, Tier 2, banks will simple hold accounts with Tier 1 banks. Smaller local banks may even be Tier 3. When it comes to foreign currency dealing, you could be even further down the chain (i.e. a small bank in Australia may be Tier 4 for USD)

Because of this hierarchy a certain amount of electronic banking can be done without moving reserves. A transfer only needs to progress up the hierarchy until it gets to a common bank between the two customers.

So for example:

• A payment between two accounts at the same bank, can be done on that bank's systems.

• A payment from an account at a Tier 2 bank, to a different Tier 2 bank might be done using a shared Tier 1 bank. The Tier 2 bank's are "customers" of the Tier 1 bank, and so the Tier 1 bank can do the transaction on their system.

• A payment between customers that ultimately fall under two different Tier 1 banks must be done by at a Federal Reserve bank.

• The US adds an extra complication, because there are 12 Fed Reserve banks - if two Tier 1 banks don't bank with the same Fed Branch, then the Fed Reserve System also has to go "one step higher" and the New York Fed acts as the very top bank: "How do reserves move between the 12 federal reserve banks?" explores exactly how that is done.

So the problem in your scheme is you couldn't get your central bank "into" this pyramid of banks.

Your central bank's computer can show $1tr on screen but the only way to transfer to another bank, would be to instruct YOUR Fed bank to take money out of YOUR fed reserve account and put it into the other bank's account. Your central bank can't make reserve dollars.

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Aside: An alternative way of looking at this, for those familiar with how BitCoins work, is to note that the important feature of electronic money is to prevent double spending. BitCoin does this with the BlockChain; the USD equivalent of the block-chain is held on the Fed Reserve computers. You can't just declare yourself to have billions of bitcoins - to spend them you have to get your transactions onto the BlockChain. With electronic USD you have to get your transactions onto the Fed ledger. Only the Fed has a copy of this and their say is final. There would be no way for your central bank to change the Fed ledgers.

Answer 2

When you go to spend the proceeds of the bank loan you do one of three things:

1. Transfer money to another account at the same bank
2. Withdraw cash
3. Transfer the money another institution

We'll ignore case 1 because eventually someone you transfer money to will want access to two or three, so we can just consider those eventualities directly.

If you go to withdraw cash, the bank has limited cash, as opposed to an unlimited (at least in principle, ignoring the requirements of integrity and law) ability to make changes in their account ledgers. So they can't actually give you more cash then they have.

If you go to transfer money to another bank, it helps to consider why is some other bank is willing to credit an account when some other bank says that it should. The basic answer, notwithstanding complexities like clearing houses and central bank check clearing, is that banks have accounts with each other. When customer Anabel tells bank Bryce to move \$100 to bank Charlie in the account of customer David Bryce does so by debiting \$100 from Anabel's account and crediting their own \$100. Bryce then tells Charlie to debit \$100 from his account (and credit his own) and delivers additional instructions to credit David. Charlie then debits \$100 from his own account and credits \$100 to David. Which gives you a hint as to Bryce's ability to credit anyone outside the bank, even at gunpoint. Bryce can't get Charlie to credit Charlie's accounts for more than the total credits that Bryce has with Charlie's bank. Maybe he can get a "check float loan" to process a limited number of transactions like this, maybe he can get some direct credit from David, but eventually these margins will be exhausted. Cash or securities will need to be deposited at Charlie's bank before Charlie will allow additional transactions on Bryce's behalf.

Answer 3

The same way you'd be stopped if you decided to purchase a bunch of stocks from the stock market, or at least the market would be close for appreciations, I imagine the same would happen if you decided to acquire a significant amount of money as that has many implications in exchange rates, debt, and so on.

This is regular procedure in Portugal, a "small, economically and geopolitically unimportant country".