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 the increase monetary supply of dollars went beyond the backing of gold reserves which reduced the value of the currency reserves held by foreign countries the gold to dollar decouplingas the united states continued to flood the markets with paper dollars to finance its escalating war in vietnam and the great society programs the world grew cautious and began to convert dollar reserves into gold the run on gold was so extensive that president nixon was compelled to step in and decouple the dollar from the gold standard which gave way to the floating exchange rates that are in use today soon after the value of gold tripled and the dollar began its decades long decline continued faith in the u s dollareven with de dollarization the u s dollar remains the world s currency reserve the status is due primarily to the fact that countries accumulated so much of it and that it was still the most stable and liquid form of exchange backed by the safest of all paper assets u s treasuries the dollar is still the most redeemable currency for facilitating world commerce for this reason it s highly unlikely the u s dollar will experience a collapse any time soon the euro introduced in 1999 is the second most commonly held reserve currency in the world according to the international monetary fund imf which is charged with promoting global growth and trade central banks hold more than 6 7 trillion in dollar reserves versus 2 2 trillion in euros as of q4 2019 1