Why The US Dollar Is The World’s Reserve Currency

Notably the dollar is one of the most powerful currencies and if not most powerful right now. But it is also the international reserve currency for all countries and so we are digging a little deeper to find out why and how? The first dollar notes were published as demand notes to fund the Civil War of 1861. The notes were then known as greenbacks because of their green color. The legal tender, called the United States Notes, was first published in 1862, and a standardized system for printing the notes was first developed in 1869.

So What is a reserve currency?
A reserve currency is used to minimize exchange rate risk, as the purchasing nation will not have to exchange its currency for the current reserve currency to make it’s purchases. In this case, since 1944, the U.S. dollar has been the primary reserve currency used by other countries. Foreign nations closely monitor the monetary policy of the United States to ensure that the value of their reserves is not adversely affected by inflation or rising prices.

How It Became;
The World War II devastated European and Asian economies while leaving the United States’ economy relatively unharmed. As European governments exhausted their gold reserves and borrowed to pay the United States for war material, the United States accumulated large gold reserves. This combination gave the United States significant political and economic power following the war. The Bretton Woods agreement codified this economic dominance of the dollar after the war. In 1944, Allied nations sought to create an international monetary order that sustained the global economy and prevented the economic malaise that followed the First World War. The Bretton Woods agreement laid the foundations for an international monetary order that created rules and expectations for the international economic system. It created the International Monetary Fund (IMF), the predecessor of the World Bank, and an international monetary system based on fixed exchange rates. It valued the dollar at $35 per ounce of gold and the remaining signatories pegged their respective currency relative to the dollar, leading some economists to argue that Bretton Woods “dethroned”gold as the default asset.

While Bretton Woods institutionalized the dollar’s importance following the war, Europe and Asia faced dollar shortages. The international community needed dollars to finance imports from the United States to rebuild what was lost in the war. In 1948 Congress passed the European Recovery Program – generally known as the Marshall Plan – giving dollars to European countries to purchase imports needed to rebuild their economies. The plan helped European countries by providing them dollars to purchase the imports needed to produce exports, eventually allowing the countries to export enough of their own goods to obtain the dollars necessary to sustain their economies without reliance on any Marshall-like plan. At the same time, Joseph Dodge worked with Japanese officials and Congress to pass the Dodge Plan in 1949, which worked similarly to the Marshall Plan, but for Japan rather than Europe making the dollar acquire more acceptence as an international reserve currency.

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