Have you ever wondered why the US dollar is the reserve currency and not any other currency of the world? The USD is used extensively for international trade in the economy, and the key reason why it was chosen can be attributed to The Bretton Woods Conference that took place in 1944.
Kavan Choksi on how the USD became the global reserve currency
Among all of the currencies across the globe, the US dollar is the most powerful and is widely used in international transactions. It is the reserve currency of the world and is used as a benchmark for international trading in the economy.
Esteemed entrepreneur and expert in finance Kavan Choksi stated that the dollar in the USA had a fascinating history before it gained the status of becoming the reserve currency in the world. Before it bagged the privilege, international trade transactions were carried out using silver and gold.
Selecting the USD as the reserve currency
It was at The Bretton Woods Conference, held in 1944 that world leaders from the strongest nations of the world unanimously agreed to fix the US dollar as the world’s reserve currency. The objective here was to create a uniform system where they would be an exchange rate of major world currencies that would stay fixed against the USD. The above implied that these nations, instead of keeping gold as reserves, would hold the US dollar instead.
Why did the US dollar bag this global honor?
The world leaders at the Conference decided to choose the US dollar as a reserve currency as, after the Second World War, every economy except the USA was negatively affected. Even its influential peers like Germany and Japan had their economies severely hit by the effects of the War.
During this period, the USD could be converted into gold for a rate of $35 for each ounce. In the world, it was the USA that retained most of the gold, and it could offer a secure supply of it as well. The leaders at the Conference declared that the USD would become the reserve currency of the world since it is used for international trade significantly in the global economy.
USA held most of the gold
Almost 50% of the economic output of the world after the Second World War was owned by the USA. It was during this period that America started its interventionist policy for international trade relations. Sadly, those nations that were considered to be modern during the period were deeply affected by the aftermath of the War. They were either in a severe state of chaos or were under communist dictate. Europe had to be rebuilt, and the implementation of The Marshall Plan was an example of the above endeavor.
According to eminent business and finance expert Kavan Choksi, the USA never wanted another war. This is why it retained a strong military presence to deter the forces of the Soviet Union in Europe. Assets under the control of the dollar were safe during this period, contrary to the other nations in the world that were crumbling under the stress and pressure of political instability.