Why is The US Dollar the World’s Currency

Why is USD the world currency?

US Dollar

It’s no secret that USD is the world currency. If you’ve tried to buy online from popular companies before, you’ll most likely find that the price is in USD and that sometimes, they won’t even ship to Australia. But apart from the additional annoyance of shopping online, what’s the deal with USD?

The US Dollar is the official currency of the United States and is among the strongest currencies in the world. It is also the official currency of a few other countries too. It has quite a wide history behind it, with the first US Dollar being printed in 1914. The printing began about a year after the Federal Reserve Bank was established.

US Dollar Coins

The first noted use of paper currency in the US can be traced back to 1690, when the Massachusetts Bay Colony issues colonial notes. For the most part, these notes funded military operations. It took until 1776 for the first $2 bill to be introduced, exactly nine days before independence. About nine years later, in 1785, the US officially adopted the dollar sign we know today. The currency symbol was based on the Spanish dollar.

It wasn’t until 1944 that the United States dollar was officially established as the world’s primary reserve currency and was backed by the largest gold reserves in the world due to the Bretton Woods Agreement. As countries needed a place to store their dollars, they began to buy US Treasury securities. This demand for Treasury securities was so high that there began to be concerns over the stability of the United States dollar, so countries decided to convert dollar reserve currency into gold. The gold demand grew to such an extent that the current President, Richard Nixon, was forced to de-link gold from the dollar, leading to the exchange rates we know today.

These are only the basics, there is much more to learn on how the US Dollar became the world’s primary reserve currency!

The role the Federal Reserve Bank played

Federal Reserve Bank

The role the Federal Reserve Bank played

The Federal Reserve Bank was created, by the Federal Reserve Act in 1913, to fight any instability and unreliability of the currency system. Understandably, quite a few issues arose as the system was previously based on banknotes issued by banks. At this time, the United States became the world’s largest economy, passing the United Kingdom. However, most transactions still were in British Pounds instead of the United States currency.

In an attempt to stabilise currency exchange rates, most countries used gold. But, once World War I started in 1914, countries chose to suspend their gold reserves and use paper money to pay their military expenses. This quickly devalued their countries but Britain, on the other hand, kept to the gold standard in order to maintain its position as the world’s leading currency. During the third year of the War, Britain had to borrow money for the first time.

The United States was an obvious choice for borrowing money, especially for countries that wanted to buy US bonds that were dollar dominated. By 1931, Britain had finally let go of the gold standard and the dollar replaced the pound, making it the leading world reserve currency.

As for today, the US Dollar still remains the world’s reserve currency. Central banks have approximately 59% of their reserve currency in US Dollars, as stated by the International Monetary Fund. Much of this reserve currency is in US bonds (such as the US treasuries) or cash.

Sometimes, the general public believes that this makes the US currency the strongest in the entire world due to its high-interest rates. While it does have a good position in the global markets, it ranks 10th on the list. The Kuwaiti Dinar is the strongest, while the British Pound and Euro are in the 5th and 8th spots.

What does the US Dollar being the official currency mean for the future?

Official Currency

As a refresher, the US Dollar earned its spot as the official reserve currency of the world in 1944. This decision was made by a sum of 44 Allied countries, the agreement deemed the Bretton Woods Agreement. But, what’s next for the world? What could surpass the American Dollar?

US Dollar being the official currency

There are quite a few other major currencies that could replace the US dollar as the world’s reserve currency. If economic conditions are in its favour, the euro may replace USD as it is the second most used reserve. The Euro does not have a central Treasury unit, though, which does make this process more complicated. China’s currency, Renminbi, is also another possibility, one that the country’s leaders and government seem keen on pursuing.

Ultimately, this reserve currency status is quite largely based on the United States economy’s strength and size. Despite the US’ large spending, huge debt, and large printing of USD, treasuries are still one of the safest ways to store money and the American Dollar remains at a high exchange rate. However, many countries still have the potential to eventually surpass it. We hope this guide has been helpful, and that you’ve learnt much about the history of the reserve currency! You can check the dollar index to find out more about the US Dollar.