Title: What Is a Reserve Currency?
Headings: Reserve Currency
Reserve Currency
What Is a Reserve Currency?
Key Takeaways
Explaining Reserve Currency
Understanding Reserve Currency
How the U.S. Dollar Became the World’s Reserve Currency
The Gold-to-Dollar Decoupling
Continued Faith in the U.S. Dollar

Content: As a result, foreign nations closely monitor the monetary policy of the United States to ensure that the value of their reserves is not adversely affected by inflation or rising prices. How the U.S. Dollar Became the World’s Reserve Currency
The post-war emergence of the U.S. as the dominant economic power had enormous implications for the global economy. At one time, U.S. Gross Domestic Product (GDP), which is a measure of the total output of a country, represented 50% of the world’s economic output. As a result, it made sense that the U.S dollar would become the global currency reserve. In 1944, following the Bretton Woods Agreement, delegates from 44 nations formally agreed to adopt the U.S. dollar as an official reserve currency. Since then, other countries pegged their exchange rates to the dollar, which was convertible to gold at the time. Because the gold-backed dollar was relatively stable, it enabled other countries to stabilize their currencies. In the beginning, the world benefited from a strong and stable dollar, and the United States prospered from the favorable exchange rate on its currency. The foreign governments did not fully realize that although gold reserves backed their currency reserves, the United States could continue to print dollars that were backed by its debt held as U.S. Treasuries. As the United States printed more money to finance its spending, the gold backing behind the dollars diminished.