Eli5: Why is the U.S. Dollar so powerful?
In: 208
Pretty much the last major economy not destroyed after WW2. Big army, big economy, developed and produced many technologies – pretty much all electronics, computers, microprocessors, the Internet etc etc.
Many countries relied on US to consume their exports. In order to export to a country, you end up holding their currency.
A historically stable institution that also is a global superpower and has never missed an interest payment makes it one of the safer places to store wealth.
In a word? Reliability.
The US has never missed a payment on its bonds, ever. That, combined with the overt military power projection and its history as the global currency makes it very attractive.
Everyone takes US dollars. Literally, everyone.
Post-WWII, the US had pretty much the only industrial complex that hadn’t been bombed to shit. In addition, WWII gave the US military bases all over the world.
That meant that for a good while, pretty much every crate of goods going anywhere in the world had “Made in the USA” stamped on it. And they went everywhere. Those military bases meant the US had a physical presence and a familiarity with countries all over the world.
That meant the US could dictate terms. For example, all oil would be traded in US dollars. Does France want to buy some oil? Well, they’ll have to buy dollars first to pay for that oil.
The US had also gotten acquainted with a whole lot of countries that had nice products and natural resources of their own that the US would love to get their hands on. So the US made an effort to install capitalist values or even just outright capitalist regimes that were friendly to the US in as many countries as possible. That way those countries would start trading their resources to the US at beneficial terms for the US.
This is what led to the cold war. The Soviet Union saw where this was heading and had no interest in a global American empire. So while the US was installing capitalist regimes anywhere they could. Russia started installing communist regimes that would trade their stuff to Russia instead.
And while the two were never officially at war, they had no problem with spycraft, assassination and funding bloody rebellions, revolutions and coups in many Asian and South American countries to sway those countries towards capitalism or communism.
The end result is a world where the US has influence and trade relations all over the world and that made the dollar very important.
All the petrol business are used in dollars, imposed by the USA. So, if a lot of people are using dollars or dollars are used in a lot of business, the dollar gains strength
I think you mean stable. I read somewhere it has something to do with the oil from foreign nations(UAE) being denominated in us dollars
So in school, there are three cliques: the jocks, the nerds, and the normies. However, every one in school follows the same trends, memes, etc. It just so happens that the normies produce the sickest content including these sweet cards that have faces of the most popular normies on them. If you have one of these cards, you know that you have something that other people would want. Therefore, you know that if you see that someone else has something you want, you can trade them one or more of these normies’ cards for it.
In essence, the normies’ cards are the dollar on the smallest and most trivial scale. The dollar’s value has remained stable for so long with institutional capital behind it (government recognition of its value) that it is nearly a guaranteed to be a holder of value into the future. In folk economics, you want to be confident that a unit of currency in your wallet today will be able to buy the same amount of good in your wallet tomorrow. It is a near guarantee (at least in the long-run past) that your dollar will largely be able to purchase the same amount of good in a years worth of tomorrows, relative to say the Russian Ruble. That’s why a lot of global corporations and businesses will operate in the dollar: there’s a lower likelihood that you will lose value simply due to the whims of the currency market (which is technically just a very x100 complex popularity contest).
It’s where everyone in the world wants to shop. You need dollars to shop/do business there.
You gotta think of countries like picky vending machines. Every country has a menu and you have to pay in THEIR currency to get the vending machine to do something (exceptions exist of course, especially with the dollar itself).
The US machine wants dollars only, and it has a VERY large and extensive menu. The machine also breaks down very infrequently and generally most items are in stock.
So it’s a good bet to keep some dollars around since most likely, even in rough times, you can purchase some things you might not otherwise be able to get.
I’ll take a crack at this like you are 5.
When people want something a lot, like something popular, it is worth more. Right now, the dollar is popular. There are many reasons for this. It is reliable and trustworthy, you can buy lots of stuff with it even outside of the US, most oil is bought with dollars, and the US will probably be around I’m 100 years, so will the dollar.
Right now, interest rates are going up in the US, so lots of people want dollars to put in US banks. This makes the dollar worth even more.
OP, you probably aren’t five so it might be easier to say currencies just operate on supply and demand principles and ours has a lot of demand increasing its value.
The same thing that makes any currency powerful: Demand for the products you can buy with it. A better question to ask is, “Why aren’t other currencies as strong?”.
The simple answer is size and *safety*. There are only so many economies on a scale of the American economy, so the possible contenders for a substitute for the U.S. dollar as the de-facto reserve currency of the planet would be the Euro and the Yuan. Both of those currencies have some fundamental problems which keep them from being more enthusiastically adopted.
In the case of the Euro, the problem is the currency is not backed by a unitary state, and in a larger geopolitical problems plaguing the EU, like Brexit, the various economies in crisis which are part of the trading bloc, do not support investor confidence.
In the case of the Yuan, there’s a unitary state, and certainly nobody thinks China is going to up and vanish, or break up, but investors are even more distrustful of the PRC leadership than they are of the fragmented confederation of the E.U.
And once you exclude those two countries, there’s really not much in the way of options. Japan? India? The United States is the country that’s big enough, rich enough, and least likely to default on the obligations of their treasury, or co-opt the wealth of the people positioned on the dollar.
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