The U.S. dollar is the world’s reserve currency. And the greenback’s value in global trade is virtually universal. Today, most of us know this fact on some level by instinct, but this was not always the case.
To understand how the U.S. dollar managed to reach this level of importance in world commerce and what the future may hold for it, let us go back in time and analyze the status quo.
As pointed out on Fortunly’s infographic, The greenback we are all familiar with was first printed in 1914, the year after the Federal Reserve Bank was established.
At that time, the British pound was the main reserve currency across the globe. The U.S. dollar did not dethrone the British pound in world commerce until the end of the 1910s.
In 1919, the United Kingdom was forced to break away from the gold standard because of the economic pressures of World War I. That moment marked the ascendancy of the greenback to the top of the currency hierarchy.
The U.S. dollar became the official reserve currency of the world after the Bretton Woods Agreement of 1944.
This event was attended by delegates from 44 Allied nations with the goal of creating a new foreign exchange system after they became rather gold-strapped. They bought most of their military needs during the Second World War from America chiefly with gold. After the war, the United States found itself to be the largest holder of gold reserves on the planet.
The participants decided to peg their own currencies to the USD and maintain fixed foreign exchange rates while the greenback would be linked to gold for stability. In addition, America agreed to convert the U.S. dollar reserves of other nations into gold on demand.
Needing to accumulate substantial reserves of U.S. dollars and have a convenient means of storing them, other countries started purchasing U.S. Treasury securities.
However, the stability of the USD became questionable after the United States practiced deficit spending to finance its participation in the Vietnam War. Combined with the increase in demand for U.S. Treasury securities and the need to fund domestic programs for the Great Society, America kept printing money, which flooded the market with an overabundant supply in circulation.
Concern about the overvaluation of the greenback scared other countries. As a result, they began redeeming their U.S. dollar reserves for gold. This phenomenon led to the depletion of America’s gold reserves.
To stop USD speculation, President Richard Nixon put an end to the gold convertibility of the greenback in the early 1970s. Consequently, the fixed exchange rates became floating, which we can still observe today.
Although the U.S. dollar has been fiat money for nearly 50 years now, it has maintained its status as the world’s reserve currency because of the strength and size of its economy. But then again, America may be unwittingly pushing other global powers away from their dependence on its currency.
China, India, Turkey, Iran, and Russia are some of the countries, including a few European nations, trying to explore novel ways to trade while avoiding direct and indirect economic sanctions from the United States. The potential acceptance of cryptocurrency as legal tender may also pose a threat to the U.S. dollar’s global dominance.
The new chapter in the greenback’s story has begun, and no country has more power to prevent the U.S. dollar from suffering the fate of the British pound than America itself.