Many explanations I read come down to “almost everyone uses the dollar in international trade”, ” almost all energy is invoiced and paid in dollars” and “almost all international financial flows go through NY one way or the other”, but that just seems a restatement of the fact that the dollar is the reserve currency of the world. My question is: why? How did it end up that way?
In: 19
Post WW2, the US was the only fully functioning developed economy of the time. Through the Bretton Woods agreement in 1948, the major currencies of Europe were pegged to the USD and, in theory, pegged to gold ($35 USD/oz).
The USD was essentially as “good as gold”. However as economies rebuilt and recovered, one of the driving factors in globalization is that the US largely allowed free trade with the US. Countries like Germany and Japan (for eg) focused on export intensive industrialization and the main export market was the US (as the largest economy by far). As the decades proceeded global trade became lopsided with the US running persistent trade deficits (since the late 1970s) ie the US became the country everyone wanted to sell to.
Also in the 1970s, the US struck a deal where most oil sales would be globally priced in dollars.
By the 1980s and 1990s, because of the trade flows, most banks held lots of USD and it became a widely accepted benchmark for trade. USD were widely available, trusted by nearly everyone and in sufficient quantity to facilitate global trade (even if the trade did not involve the US).
The USD therefore became the “reserve” currency – banks around the world held reserves of USD. Importers simply found it easy to go to their local bank and give their local currency and change it to USD. The counterparty (the exporter) used their bank to accept the USD and convert it back to the exporter’s domestic currency. The USD became the intermediary currency for trade because it was available and secure.
Latest Answers