Globalisation may be a new concept, but globalised trade is not. That is why the concept of Reserve currency is as old as international trade itself. Greek drachma, Roman denari, Byzantine solidus, Arab dinar, French franc, Spanish Silver Dollar have done the job for respective trading blocs in the past.
Consider this. The first $2 bill was introduced in 1776. The dollar sign was officially adopted in 1785. US government established a mechanism for handling banknotes in 1863. Official government printing of Dollar notes started in 1869. US treasury took the responsibility of issuing Dollars in 1890. Finally, US Federal Reserve was created in the first half of 20th century. But, Dollar became reserve currency only in 1971. So, why did it take so long for the Dollar to mark its presence as reserved currency? The answer is bit complex. Let’s decode it.
Rise during World War I
Up until the beginning of the World War I, most developed countries pegged their currency’s valuation to the Gold. Suddenly, World War broke out and now countries started to print more currencies to finance their war spending. It kicked off the process of elimination of Gold.
The situation led to devaluing of currencies and even Britain was forced to borrow money from the market. Simultaneously, the United States became largest economy of the world. It became a safe bet for borrowers and Dollar-denominated bonds were new headlines in international finance.
The Great recession, Bretton Woods and US ignoring Keynes
But, it was still some time for Dollar to dominate the global trade. Specially, until British Pound’s legitimacy was there. Finally, due to absence of Gold standard, Global economy crashed in 1930s and in 1931, Britain decoupled Pound from Gold. The collapse of global economy became ultimate reason for the devastation of the World War II.
US was the only country that came out of the war richer and mightier. Many countries owed massive amounts to it and the great American economy’s slowdown was nowhere in sight.
— Atul Kumar Mishra (@TheAtulMishra) April 1, 2022
After the World War, the USA was numero uno power. Soviets were close second. Renowned Economist John Maynard Keynes pitched for bringing in a system based on Gold. But, why would the USA want to end its control?It said that under Bretton Woods system, the new system should be pegged to both Gold and Dollar. US dollar was tied with gold at a price of $35 dollars per ounce.
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So all countries pegged their currency according to the US dollar and the US dollar was tied with gold at a price of $35 dollars per ounce. US kept an equal amount of gold in its treasury.
— Atul Kumar Mishra (@TheAtulMishra) April 1, 2022
US removed Gold to protect its Dollar
Power corrupts and absolute power corrupts absolutely. The USA took full advantage of the situation and went on reckless use of Dollars for its own purpose. But, the countless Dollars forced countries to exchange it for Gold. Soon, the Gold started to vanish from US.
Finally, frustrated with all this, Richard Nixon, one of the most conservative President of the USA decoupled Gold from the Dollar and finally Dollar became the ultimate currency of World.
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