How the U.S. Dollar Became the World’s Reserve Currency

The first U.S. dollar (USD) is one of the world’s strongest currencies. It is the official currency of the United States as well as several other countries. Although it has a deep-rooted history in the United States, the dollar as we know it today was first printed in 1914.

Printing began a year after the establishment of the Federal Reserve as the nation’s central bank with the passing of the Federal Reserve Act. That’s when the Fed started issuing Federal Reserve notes in $10 denominations featuring Andrew Jackson’s portrait. Three decades later, the dollar officially became the world’s reserve currency. However, its ascendancy to the throne actually began not long after the ink was dry on that first printing in 1914.Keep reading to learn about how the dollar became the world’s reserve currency.

KEY TAKEAWAYS

  • The first U.S. dollar was printed in 1914 after the Federal Reserve Bank was created.
  • The Allies paid the U.S. for supplies in gold during World War I, propelling the U.S. to become the largest holder of gold.
  • Countries pegged their currencies to the dollar after the war, ending the gold standard.
  • The International Monetary Fund reported that 59% of all foreign bank reserves are denominated in U.S. dollars.
  • Despite its position in the global markets, the U.S. isn’t the strongest world currency, ranking 10th on the list.

The U.S. Dollar Becomes the World’s Reserve Currency

The U.S dollar was officially crowned the world’s reserve currency and was backed by the world’s largest gold reserves thanks to the Bretton Woods Agreement. Instead of gold reserves, other countries accumulated reserves of U.S. dollars Needing a place to store their dollars, countries began buying U.S. Treasury securities, which they considered to be a safe store of money.

The demand for Treasury securities, coupled with the deficit spending needed to finance the Vietnam War and the Great Society domestic programs, caused the United States to flood the market with paper money. With growing concerns over the stability of the dollar, the countries began to convert dollar reserves into gold.

The demand for gold was such that President Richard Nixon was forced to intervene and de-link the dollar from gold, which led to the floating exchange rates that exist today. Although there have been periods of stagflation, which is defined as high inflation and high unemployment, the U.S. dollar has remained the world’s reserve currency.