The Rumor that Never Died – Redbacks

One reader asked:

“I once, several years ago, read that the US had already printed “redbacks”, a US dollar to be used internationally; that is, the greenback would be used in the US for domestic trade and the “redback” would be used for international trade and it would have a higher value.

Do you have any knowledge of this and might it be true?”

US-2-Tier-Sil$

That rumor is what drove the dollar to record highs going into 1985. Between 1980 and 1985 at seminars in Europe, the number one question I was asked: “Would the US adopt a two-tier dollar to escape from its debt.” I explained that I was perhaps one of the few Americans that would even understand the question. The US had a two-tier currency during the 1870’s because silver was demonetized domestically, since Europe and the US adopted a pure gold standard in 1873. China, however, clung to a pure silver standard. Thus, to trade in Asia, they would accept silver dollars. Hence, the US stopped production of silver dollars domestically but minted “Trade Dollars” for external use only.

In 1980, the US National Debt hit $1 trillion. The Eurodollar deposits where also at about $1 trillion. Europeans were convinced that the US would adopt a two-tier currency where the external dollar would be worth LESS (not more), and hence that rumor shifted capital so that the Eurodollar deposits fell by about 50% and the money was moved to domestic deposits. The more BEARISH everyone became on the US debt, the more BULLISH the dollar became. It was the mirror image of fundamental analysis.

PlazaAccord

The rumor was false. No one in Washington would ever ponder such an idea for they were clueless about monetary systems. Nevertheless, the Europeans were convinced this would take place and moved so much cash driving the dollar higher that they then formed G5 at the Plaza Accord to force the dollar back down.