As the U.S. dollar became the world reserve currency: the history and interesting facts

The US dollar is one of the most stable currencies in the world. First dollar was released in 1914, and 60 years later he became the world’s main reserve currency. What this means and how the dollar came all the way, says “24 channel”.

Как доллар США стал мировой резервной валютой: история и интересные факты

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The birth and growth of the dollar

First dollar

Federal reserve Bank created in 1913 in response to the unreliability and instability of the monetary system on the basis of the banknotes issued by individual banks. In 1914 he published the first American dollar.

At that time the American economy has overtaken the British, becoming the largest in the world, but Britain was still the center of world trade, the most part of transactions carried out in British pounds. Also at that time the most developed countries tied their currencies to gold in order to create stability in the foreign exchange markets.

The rejection of the gold

However, when in 1914 the First world war, many countries abandoned the gold standard in order to be able to pay for their military spending paper money that depreciated their currencies. After three years of war, Britain, which persistently held onto the gold standard, to maintain its position as the country with the world’s leading currency, first discovered the need to borrow money.

The United States became a creditor to many countries who were willing to purchase us bonds in dollars. In 1919, Britain was finally forced to abandon the gold standard, destroying the Bank accounts of international traders who have used the pounds. At that time, the dollar replaced the pound as the world’s leading reserve.

The United States benefit from war

As in the First world war, the United States entered the Second world war after the outbreak of hostilities. Before that USA was the main supplier of weapons, supplies and other goods for the allies. Those paid in gold, resulting in the United States became the largest holder of gold in the world. This prevented other countries to return to the gold standard, because their coffers have been ravaged by war.

In 1944 in Bretton woods, state of new Hampshire, delegates from 44 allied countries met to create a monetary system that would not put any country at a disadvantage. Decided that currencies can be pegged to gold, but they can be pegged to the us dollar, which is pegged to gold.

The Bretton woods agreement

The agreement, which became known as the Bretton Woods agreement, established that Central banks would maintain fixed exchange rates between their currencies and the dollar. In turn, the US redeemed dollars for gold on demand. The country had a certain control over their currencies. If the currency becomes too strong or weak relative to the dollar, countries could sell or buy its currency and thus to regulate the rate.

The dollar as world currency

As a result, the Bretton woods agreement the US dollar officially became the world’s reserve currency, which is supported by the world’s largest gold reserves. Instead of the gold reserves of other countries have accumulated reserves in US dollars. Needing a place to store their dollars, countries began to buy Treasury securities of the United States, which they considered safe.

Gold is back in fashion

The demand for Treasury securities, combined with deficit spending needed to Finance the Vietnam war and domestic programs of the Great society forced the United States to flood the market with paper money. With the growing concern about the stability of the dollar countries began to convert dollar reserves into gold.

The demand for gold was such that President Richard Nixon was forced to intervene and to decouple the dollar from gold, which led to floating exchange rates that exist today. Although there were periods of stagflation – high inflation and high unemployment – the U.S. dollar remained the world’s reserve currency.

The dollar today

To date, more than 61% of all reserves in foreign banks denominated in U.S. dollars, according to the international monetary Fund (IMF). Many reserves are in cash or U.S. bonds, for example, U.S. Treasury. Also, approximately 40% of the world debt – in dollars.

The status of the reserve is largely based on the size and strength of the American economy and the dominance of the financial markets of the United States. Despite large deficit spending, trillions of dollars of foreign debt and runaway printing of us dollars, Treasury securities of the United States remain the most secure. Trust and confidence in the world that the U.S. can pay its debts, maintaining the dollar as the redemption of currency to facilitate global trade.

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