How "Dollar" became "The World Currency"
- Kumar Rahul Singh
- Aug 12, 2020
- 3 min read
We always hear in the news that India-China trade deficit is around $50 Billion, The US announced a coronavirus economic package of $2 billion, the GDP of India in nominal terms is around $ 2.9 trillion, ever thought why everything is predominantly evaluated in US dollars, why not in Rupee, Yuan, Yen or Euros. Currency is used to buy and sell commodities then why is a currency dominating all others?
About 45% of the international trade took place in dollar, 65 % of the world's debt is issued in dollars, 60% of the world's foreign currency reserve is in dollars according to The European Central Bank in 2019. For evaluating any countries economic situation, the amount of foreign currency reserve they have is a major aspect like India has $534.3 billion (as per July 2020 and also all-time highest) whereas China has $3.29 billions. Both have about ⅔ foreign reserves as dollars.
USD also has been known as the "World's Reserve Currency"
Not only USA but many economies named their currency dollar namely Australia, New Zealand, Canada, Taiwan, but when said in general, the dollar strongly symbolizes the US dollar. Many countries like Ecuador, Zimbabwe, Timor-Leste uses USD as their official currency too!!
The feet dollar achieved is not overnight. Dollar arrived as the US official currency in 1914, it is issued by their Central Bank known as "Federal Reserve of United States". Before World War 1, countries used to trade in gold and had pegged their currency to gold to provide stability in currency exchanges. But in 1914, the world war broke, forcing the countries to abandon the gold standard to pay their military expenses with paper money, resulting in devaluing their currency. In history , it was the first time that Britain had to borrow. Also during these times, the countries used to buy military equipment and other goods from US, for which they paid in gold, making the US the holding majority of the world's gold.
From 1 July to 22nd July (1944),730 delegates from 44 Allied Countries met in Bretton Woods, New Hampshire(United States) to discuss new international monetary and financial order after the end of world war 2.During this conference, it was decided that all the currencies will be pegged to the US dollar while the dollar will be linked to gold at an exchange rate of $ 35 per ounce. US dollar was given the status because at that US economy was the strongest as its today. It held the majority of the world's gold at that time (now too) also during World War 2, all the currencies were fluctuating only the USD was the only to reliable and stable.US also promised limited printing of dollars. This agreement came to be known as the"Bretton Woods Agreement". Also in this conference,the foundation stone of the International Monetary Fund(IMF) and International Bank for Reconstruction and Development(which later became a constituent of World Bank) was laid down.
But during the 1950s and 1960s US started printing more dollars to finance the Vietnam war, realizing these countries started withdrawing their gold from the US federal reserve namely Switzerland and West Germany. This leads to a fall in the price of the dollar and inflation in the US. In 1971, when France demanded their gold back then US president Richard Nixon, on a television refused to return and suspended the Bretton Woods Agreement, thus the gold-dollar convertibility was over resulting in the birth of floating exchange rates which we see now that the value of a currency will be determined by the market's demand force. However, then almost every country has its forex reserve filled with dollars. In 1974, Richard Nixon arrived in Saudi Arabia to play the real 'masterstroke", he signed a deal with King Faisal that allowed the gulf country to sell oil only in dollars, he also signed a deal with other Organization of Petroleum Exporting Countries (OPEC) later on, in return US assured the security of their oil fields and some support in the Arab-Israel Conflict,making dollar the "new gold".This also lead to the birth of a new concept called "Petrodollar".
The strength of the dollar is backed Wahington D.C's political and economic stability and assurance of their financial system. Countries have trust in the dollar and investors are willing to invest in it. Can anyone dethrone the dollar? In 2009, Russia and China demanded a new global currency from the IMF. Countries like Iran, North Korea who are impacted by the US sanctions are more comfortable with other currencies. Iran started selling oil in other currencies too. The rise of the Euro and Chinese Yuan is also prominent. Some say, a cryptocurrency like bitcoin can. The possibilities are many, but this not going to happen anywhere in near future for sure.
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