The reported death of US dollar dominance has been greatly exaggerated. The dollar’s demise has been repeatedly prophesied, supposedly threatened by any number of currencies including the euro, the yuan, and recent hints of a gold-backed currency from the BRICS countries (Brazil, Russia, India, and China).
Will the US dollar maintain its global dominance? Is there a role for bitcoin in US policy?
In a recent paper titled “The Treasury Standard: Causes and Consequences,” which was published in an edited volume of articles related to bitcoin, economist and AIER SMP Senior Fellow Joshua R. Hendrickson explores the historical relationship between central banking and national security. He finds that the US dollar dominance of the international monetary system and associated demand for US Treasury bonds helps reinforce America’s global military regime.
Further, the paper demonstrates how American officials and policies have actively contributed to expanding this system.
Hendrickson dubs this system “The Treasury Standard.” His paper has important implications for the future of bitcoin and how it might be treated by governments.
Read ‘The Treasury Standard’
There is much to like in “The Treasury Standard.” First, Hendrickson devotes two full sections to the government’s historical role in money. Section 2 starts with theories of commodity money and coinage before moving to bills of exchange and banknotes. The evolutionary process he describes fits the historical evidence.
Alternative theories emphasize the role of the state in creating money and determining the type of money used. As Hendrickson correctly notes, however, governments did not create money. Rather, they have continuously intervened in the monetary system to benefit themselves through “debasement, devaluation, and currency issuance,” often at the expense of the public. Despite such abuses, emergency spending powers are vital to the preservation of the nation itself. These costs and benefits must balance in order to minimize harm to the public and maximize long-run stability.
In the case of the United States, the ascendance of the Treasury Standard strengthened the growing relationship between national security and the monetary system. It solidified the Treasury’s international influence by making foreign powers reliant on US policy. However, persistent deficits, as experienced in recent decades, could destabilize this equilibrium.
Second, Hendrickson addresses an issue that is often avoided by economists: the role of policy in creating the Treasury Standard. Economists like simple stories about the effect of price controls and other policies, which might include capital controls or exchange rate manipulations in international finance. In contrast to the usual economic approach, Hendrickson describes the Treasury Standard as a mix of coordinated policies and political pressure to achieve a stated end: dollar dominance.
Policy Implications
While Hendrickson does not discuss bitcoin directly in the paper, he nonetheless provides some insight for thinking about bitcoin-related policies. Should the US government encourage bitcoin adoption? Should it hold bitcoin as a reserve asset? How would such pro-bitcoin policies affect its fiscal and monetary policy?
International Bitcoin Adoption
On the surface, greater bitcoin adoption would seem to undermine the Treasury Standard. But that only holds if one assumes those adopting bitcoin would have otherwise used the dollar. If, instead, one expects bitcoin to displace other major currencies, then its ascension might bolster the Treasury Standard by functioning as a neutral dollar alternative.
The Treasury’s decision to weaponize the dollar through sanctions and exclusions from the SWIFT bank routing network has made the dollar less attractive to foreign governments. Foreigners are already starting to turn away from the dollar, and foreign governments are actively developing dollar alternatives. In this context, the US benefits—that is, suffers less—from the adoption of a neutral alternative like bitcoin. Ideally, the Treasury would like foreigners to continue using the dollar, but if they do move away from the dollar, the Treasury would prefer them to switch to bitcoin rather than to the yuan, ruble, or some other currency controlled by one or more rival governments.
Of course, bitcoin is only useful to the US in this context if foreigners prefer it to the available alternatives. The success of the Swiss franc suggests they might use bitcoin as a reserve asset or for use in international trade. Due to its well-known stable long-term value, the Swiss franc is widely used in international trade as a vehicle currency–that is, between parties in non-Swiss nations, not with the country of Switzerland itself. As I have discussed elsewhere, “despite Switzerland having only the 19th-largest economy in terms of GDP, the Swiss franc is the 4th most commonly used currency in international trade and the 6th most widely held foreign reserve currency.” Thus, there seems to be strong demand for a stable currency in international trade, and bitcoin offers even more security against the risk of monetary expansions than the Swiss franc.
Government Bitcoin ‘Hodling’
What if the Treasury itself were to hold (or “hodl” in crypto lingo) bitcoin, as in proposals such as the Strategic Bitcoin Reserve? As Hendrickson has elsewhere explained, holding bitcoin would provide stability through diversification of the government’s assets, creating an option that could be exercised if the Treasury’s fiscal position deteriorates. The government’s commitment to bitcoin could have some self-reinforcing value of stabilizing the price, setting expectations and quelling complaints of the asset being intrinsically worthless.
Despite these benefits, it is not clear what effects “hodling” bitcoin would have on the federal government’s fiscal position. A higher bitcoin price (which most Bitcoiners take for granted, but many others question) would enable a bitcoin-holding government to pay down some of its debt. But it would not require it. In fact, politicians might respond to a higher bitcoin price—or, even an expected higher bitcoin price—by spending even more! Thus, a bitcoin reserve may not have the effects many Bitcoiners expect unless it is coupled with other policies that constrain spending.
BitBonds
Another proposal would see the government issue Treasury bonds that are at least partly backed by bitcoin, with any profits realized from the bitcoin backing shared between investors and the government. These “BitBonds,” proponents argue, would allow the government to take advantage of the risk reduction associated with diversification and, in doing so, lower the government’s cost of borrowing. Some private companies are already taking a similar approach in order to finance real estate loans. The BitBonds proposal is also similar to a proposal by Judy Shelton, which would see the US Treasury issue bonds backed by gold.
As with the bitcoin reserve proposal, it is not clear that issuing BitBonds would do much to improve the government’s financial position. Such proposals, on their own, do not constrain federal spending. Indeed, they relax the existing constraints on spending, which might encourage politicians to spend even more.
Bitcoin and the Fed
While the fiscal benefits of a bitcoin reserve or BitBonds are unclear, some point to potential monetary benefits. Would the establishment of a bitcoin reserve or the issuance of BitBonds provide an effective constraint on the actions of the Fed? Maybe. The answer depends on how such efforts were implemented.
Holding bitcoin as a reserve asset does not directly constrain the Fed. Domestic holders of Federal Reserve notes have not been able to redeem those notes for any asset since we went off the gold standard in 1933. Even if the Fed still owned gold today (which it does not), it would not be required to redeem dollars for gold. Similarly, if the Fed were to hold bitcoin reserves, it would be under no obligation to redeem its notes for bitcoin. It might sell its bitcoin to protect the purchasing power of the dollar, should the demand for dollars decline. But it would not be required to do so. Hence, holding bitcoin—on its own—would not constrain the Fed. It would merely give the Fed an option similar to that provided by other assets the Fed holds.
Although holding bitcoin would not constrain the Fed, the existence of bitcoin might. If bitcoin were to provide a neutral dollar alternative in international finance, as previously discussed, it would provide an alternative for dollar users concerned about higher inflation. The Fed would have to take that exit option into account when setting policy. Hence, the Fed’s ability to devalue the dollar might be limited if bitcoin provides dollar users with an attractive alternative. To be clear: I do not believe bitcoin represents a serious threat to the dollar in the near future. However, all changes are marginal, and marginally higher inflation would encourage some dollar users to rely more heavily on alternatives, including bitcoin.
The prospect of widespread switching to bitcoin is especially pertinent when considering extreme scenarios. Consider, for example, what would happen if the Treasury’s fiscal imbalances continue to the point of near default. Many assume the Fed would intervene to support the economy, lowering interest rates and inflating the dollar to avoid fiscal default. However, bitcoin—and, indeed, any credible dollar alternative—would limit the Fed’s ability to do so. Moreover, a general understanding that the Fed will be limited in its ability to mitigate the damage of default raises the expected costs of default. Hence, the existence of bitcoin might encourage politicians to rein in excessive spending or raise additional revenue in order to avoid approaching default in the first place.
Conclusion
Hendrickson takes history and politics seriously. In “The Treasury Standard,” he provides a theory of dollar dominance in the post-Bretton Woods monetary system based on the needs of emergency war financing while minimizing economic disruptions and explains how this balance may be destabilized by unsustainable US debt. While he focuses on the historical and political forces that established the current regime in the paper, he also provides a valuable starting point for thinking about the future role and potential consequences of bitcoin in the international monetary system.
This article is based on comments presented at the Satoshi Papers Symposium at the University of Austin (UATX), April 16, 2025.