A Timeline of How the U.S. Dollar Became the World’s Reserve Currency
អានជាភាសាខ្មែរនៅក្នុងឆានែលតេលេក្រាម / Read the Khmer version in our Telegram channel.
The U.S. dollar is the most widely used currency in the world, accounting for about 60% of global foreign exchange reserves. But how did it achieve this status? Here are some major events that shaped the dollar’s rise to dominance.
1914: The Birth of the Federal Reserve and the U.S. Dollar
In 1914, Congress passed the Federal Reserve Act, creating a central bank for the United States. The Federal Reserve was authorized to issue a new currency, the U.S. dollar, backed by gold and silver reserves. The dollar replaced various forms of money that circulated in different regions of the country.
1914-1918: The First World War and the Gold Rush
During World War I, many European countries abandoned the gold standard and printed more money to finance their war efforts. This led to inflation and currency devaluation. The U.S., on the other hand, remained on the gold standard and supplied goods and loans to its allies in exchange for gold payments. As a result, by 1919, the U.S. had amassed about half of the world’s gold reserves, making it a creditor nation with a strong currency.
1929-1939: The Great Depression and the End of Gold Standard
The stock market crash of 1929 triggered a global economic crisis known as the Great Depression. Many countries faced deflation, unemployment and social unrest. To stimulate their economies, some countries decided to leave the gold standard and devalue their currencies against the dollar. This gave them more flexibility to adjust their monetary policies according to their domestic needs.
The U.S., however, stuck to its gold-backed dollar until 1933, when President Franklin D. Roosevelt suspended its convertibility and devalued it by 40%. He also implemented various reforms and programs under his New Deal agenda to boost economic recovery.
1944: The Bretton Woods Agreement and the Fixed Exchange Rate System
In 1944, as World War II was nearing its end, representatives from 44 Allied countries met at Bretton Woods, New Hampshire, to design a new international monetary system for post-war stability and cooperation.
They agreed to establish a fixed exchange rate system based on the U.S. dollar as the anchor currency, which was convertible to gold at $35 per ounce. Other countries agreed to peg their currencies to the dollar within a narrow range, and maintain adequate reserves of dollars or gold to support their exchange rates. They also created two international institutions, the International Monetary Fund (IMF) and the World Bank, to provide financial assistance and development aid to member countries.
The Bretton Woods system made the dollar the official reserve currency of the world, as most countries held dollars as their main reserve asset.
1971: The Nixon Shock and the End of Bretton Woods
By the late 1960s, the Bretton Woods system came under pressure due to various factors, such as the rising U.S. trade deficit, inflation, and military spending on the Vietnam War. These eroded the confidence in the dollar’s value and its ability to maintain its convertibility to gold.
Many countries started to demand gold for their dollars, draining the U.S.'s gold reserves. In response, President Richard Nixon announced on August 15th ,1971 that he was suspending the convertibility of dollars into gold, effectively ending the Bretton Woods system and creating a floating exchange rate regime.
The dollar depreciated sharply against other major currencies, such as the Japanese yen, German mark, and French franc. However, it remained dominant due to its liquidity, stability and global acceptance.
1979-1985: The Volcker Shock and Plaza Accord
In 1979, Paul Volcker became the chairman of the Federal Reserve and implemented a tight monetary policy to combat high inflation and stabilize the dollar. He raised the federal funds rate to as high as 20%, attracting capital inflows and boosting the dollar’s value.
By 1985, the dollar had appreciated by about 50% against other major currencies, making U.S. exports less competitive and hurting its trade balance. To correct this situation, five major countries (the U.S., Japan, Germany, France and Britain) signed the Plaza Accord in New York, agreeing to intervene in currency markets and depreciate the dollar against other currencies, especially the yen and mark.
The Plaza Accord succeeded in lowering the dollar’s exchange rate by about 40% by 1987, but also contributed to trade imbalances and asset bubbles in Japan and Germany.
1990s-present: The Rise of Competitors and Challenges
In the 1990s, the dollar faced competition from other currencies such as the euro, which was launched in 1999 as a common currency for 11 European countries (later expanded to 19), and the yen, which gained strength due to Japan’s economic recovery.
The dollar also faced challenges from various geopolitical events, such as the Asian financial crisis in 1997-1998, the dot-com bubble burst in 2000-2001, the terrorist attacks on September 11th ,2001, the Iraq War in 2003, and the global financial crisis in 2008-2009. These events tested the resilience of the dollar and its role in international trade, finance and geopolitics.
However, the dollar remained resilient due to its role as a safe haven currency in times of uncertainty, a vehicle currency for cross-border transactions, and a dominant currency for commodities, debt markets and official reserves.
More recently, the dollar has faced competition from emerging market currencies such as the Chinese yuan, which was included in the IMF’s Special Drawing Rights (SDR) basket in 2016, and digital currencies such as Bitcoin, which have gained popularity among some investors and users.
The future of the dollar as the world’s reserve currency depends on various factors, such as its economic performance, its fiscal and monetary policies, its political stability, its innovation and competitiveness, its network effects, and its trustworthiness.
While it is unlikely that any single currency will replace the dollar in the near future, it is possible that a more multipolar or diversified currency system will emerge in the long term.