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?
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Because after WW2 the US economy represent 50% of the entire world’s economy and was completely dominant with no real competition. Obviously as competitors like the EU and more importantly China have arisen the dollars grip on world commerce has begun to decrease.
Watch “[Global Currency: The Dollar Ain’t Going Nowhere](https://youtu.be/LiR54FPQiCs).
TL;DR – other currencies lack one or more characteristics needed for a reserve currency. E.g., can’t transfer it out of its home country, can’t be freely exchanged, not enough of the currency in circulation.
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.
Because the US is the largest economy in the world, as well as among the most stable economies in the world. Just like English has become the main international language, the USD has become the default international currency.
Note that international trade within Europe’s Eurozone – and often to/from the Eurozone – will use the Euro. It’s not as widely used as the dollar, but it is important.
The U.S. dollar became the world’s primary reserve currency due to several factors, including the size and stability of the U.S. economy, the depth and liquidity of U.S. financial markets, and the trust in the U.S. government and its ability to meet its financial obligations. The Bretton Woods Agreement in 1944 also played a significant role, as it established fixed exchange rates with the dollar backed by gold. While the gold standard ended in 1971, the dollar’s dominance as a reserve currency persists due to the continued strength of the U.S. economy and the widespread use of the dollar in international trade and finance.
not being in the firing line of the Axis powers during WW2 meant that whilst europe was in tatters the US was basically fine
it used to be the British pound up until the early 20th century, but two world wars and the associated bombing campaigns stopped that from continuing. Germany was in half after the war and nobody trusted them, france was in a worse state than Britain was
It was either the USD or nothing, so it became the USD
because after world war 2, the united states was the only one that wasn’t really destroyed.
thats an extremely oversimplified explanation.
There’s a really good episode of the Planet Money podcast from 2014 that explains the actual story:
https://www.npr.org/2022/03/09/1085605288/the-dollar-at-the-center-of-the-world-classic
Being the world’s currency reserve is a lot of work. As minimum, you must have valuable things people can purchase with their dollars.
In the 70s, the US figured out that everyone needed oil and made a deal with OPEC that they should only sell oil in USD. This is known as the petrodollar and because oil is burned every single day, every country must maintain a healthy USD reserve; they then asked for dollars for their exports and the cycle keeps going.
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