When and why did the dollar become a world currency
It is difficult to challenge the primacy of the dollar as a world currency, because it is the most stable and popular monetary unit both at home and in other countries of the world. In this article we will talk about how the dollar has conquered the world and how unshakable it is in the current realities.
The concept of world currency
The term “world currency” refers to the currency (not necessarily foreign), which is used in the vast majority of international settlements, as well as for the formation of the country’s main reserves.
I must say that there may be several world currencies. Their list is compiled by the International Monetary Fund (IMF) and now, in addition to the dollar, these include: yuan, yen, British pound, Swiss franc, and euro.
The history of the dollar as a world currency
The history of the formation of the dollar as a world currency goes back to the beginning of the XX century, when the United States was not in the best position, having a national debt of more than 5 billion. Nevertheless, they found an opportunity to provide financial support to the countries participating in the First World War. In the first 3 years of the war, the United States lent about $ 2 billion to European countries, most of which went to buy military equipment from the lending country. Thus, by the end of the First World War, the total amount of European debt reached $ 10 billion.
To pay off debts, European countries used German reparations payments (payments to compensate for damage caused during the war). Such a significant burden on the country’s economy led to a record increase in inflation, and therefore the Germans were forced to apply to the United States for a loan, the value of which amounted to $ 200 million.
The situation dependent on the United States not only remained, but also intensified during the Second World War. Then in the hands of the Americans were the gold reserves of European countries, first Norway, and later Belgium, France, the Netherlands, Poland. The States themselves, being overseas, were not affected by military operations, so their economy flourished. It was at this time that many countries began to form their reserves in dollars, believing that this is the most reliable currency in the world.
Until 1944, the role of the world currency was assigned to the British pound, but the situation changed with the adoption by the Bretton Woods Conference of the decision to recognize the dollar as a world currency. Moreover, now the dollar was equated to gold, and a fixed rate was set: a troy ounce of metal was equal to $ 35.
What does the exchange rate of the world currency depend on?
In the conditions of rapidly changing reality, it is almost impossible to predict the fate of a particular world currency for certain.
However, a number of factors can be identified that directly affect its course:
- currency convertibility, that is, how freely you can buy, sell or exchange currency;
- the volume of supply and demand in the world market;
- how advantageous is the location of the country geographically;
- the presence (absence) of economic sanctions imposed by other countries;
- oil prices;
- the foreign policy situation and the internal state of affairs.
Based on these criteria, the dollar remains the most stable and reliable global currency.
The position of the dollar now
The change of the gold standard by the Bretton Woods system did not suit everyone. So, in 1965, General De Gaulle, then President of France, demanded that the United States exchange the accumulated $ 1.5 billion for gold, which amounted to about 1.3 tons of the precious metal. Following France, Germany put forward a similar demand. It took the States 2 years to meet the demands of the Europeans and give out about 3 tons of gold in exchange for dollars.
This circumstance has led to rumors that the United States is issuing (issuing) currency in volumes exceeding the available gold reserve. And indeed, the United States then invested heavily in the Vietnam War, as well as in the space industry, trying to prove its superiority to the USSR. All this has led to an increase in public debt and, as a result, uncontrolled money issuance.
As a result, American President Nixon announced the rejection of the agreement reached in 1944, citing a significant increase in financial activity, which could not be provided with the available gold reserves.
It is worth noting that the current situation has had little effect on the reputation of the dollar as a world currency. In 1976, with the adoption of the Jamaican Currency System by the developed countries of the world, according to which the exchange rates are set by the market, not the state, the Fed (the Federal Reserve System essentially performing the functions of the US Central Bank) felt complete freedom and began to issue as many dollars as necessary.
The dollar’s share in international settlements remains the largest to this day. The British pound is slightly inferior to the euro dollar and closes the top three leaders.
At the beginning of this year, the media actively discussed the topic of the US national debt that has grown to an unprecedented size. However, despite the fact that its value has reached 30 trillion, the dollar does not give up. According to financial experts, this is due to:
- the established habit of making payments in dollars;
- dependence of countries forming reserves mainly in dollars on the exchange rate of the world currency;
- the UAE’s agreement to sell oil for dollars in exchange for the protection offered by the United States from neighboring countries;
- the reputation of the dollar as the currency of the country with the most developed economy;
- a high degree of protection of banknotes.
Countries’ desire for de-dollarization
Dedollarization refers to the partial or complete replacement of the dollar with the currencies of other countries. The dollar’s position is now so strong that other countries are literally forced to use this currency as the main one. And if the United States does not need to do anything to get the necessary amount (you can even do without the issue), then countries dependent on the dollar have to sell their goods to replenish reserves. These are mainly raw materials: oil, metals, gas.
But that’s not the only reason. So, the countries of the world were a lot excited by the events of 2008, when during the economic crisis, in order to avoid the collapse of the dollar, it was decided to lower its exchange rate. Many countries are still afraid of such precedents.
China is very active in terms of de-dollarization, which is trying to negotiate with Saudi Arabia on the purchase of oil for yuan. The successful outcome of this venture will weaken the dollar somewhat. And yet, despite all the efforts of the major developed powers, it is premature to talk about the imminent displacement of the dollar from the leading positions.
Published: 10 July, 2022