Today, about 60% of international transactions are settled in US Dollars. Gold is priced in dollars, oil is priced in dollars. Most commodities are priced in US dollars. And when a company buys goods in another country, they are often bought in US dollars, no matter what currency that country uses. This means that the entire world’s economy is affected by the US economy and decisions made at the US Federal Reserve. So how did this system come about? Read along to learn about how the US Dollar became the world’s reserve currency
For centuries, countries used gold for international transactions or pegged the value to the amount of gold they had in their vaults. This is called “being on the gold standard” The UK pound was the global reserve currency for many years, because the pound was considered as safe as gold itself. The UK, having lost its economic strength and a lot of its gold, abandoned the gold standard in 1931 leaving the US as the leading reserve currency.
The US financial position was strengthened at the beginning of WWII when many countries had to pay for goods with gold, leaving their vaults even more empty. In 1944, delegates from 44 Allied countries attended the Bretton Woods Conference to begin planning the post-war economic order. Because the US had so much of the world’s gold, the delegates decided that they would peg their currency to the US dollar and the US dollar could be redeemed for gold. This meant that the US dollar became the world’s reserve currency. While the US stopped converting dollars to gold in 1973.
Still the strength and stability of the US meant that it still made sense to use US dollars for international commerce. Since then, the Euro, Chinese Yuan, Japanese Yen and UK Pound have gained a growing percentage of international commerce and government reserves, but the US dollar still holds the largest position.
Some countries, dissatisfied with the US deficits have considered making their own reserve currency for trade between their countries. BRICS nations (Brazil, Russia, India, China and South Africa) announced on August 24 their intent to evaluate a common currency for trade. This could be some sort of international cryptocurrency or even a new physical currency. This seems like a difficult challenge. Remember it took Europe 50 years to create the Euro. These countries would have to be willing to share in the fiscal policy making. Time will tell.