Why the Dollar Is A Global Currency?
Ever wondered why the US Dollar holds so much power across the globe? It’s a question that ties history, politics, and economics together. The dollar’s dominance isn’t just about exchanging money; it’s about influence, control, and a series of strategic moves that began decades ago. Let's dive into why the dollar became the global currency and how it continues to dominate.
2025-01-01 17:12:36 - Inside Narrative
How Trade Evolved From Barter to Gold
Centuries ago, trading was simple. People swapped what they had with what they needed. If you had tomatoes but needed rice, you found someone willing to trade rice for tomatoes. This "barter system" worked for small exchanges. But what happened when people wanted to trade larger quantities or store value for the future? The system hit a snag. Perishable goods didn’t last, and trading became difficult. Enter gold and silver. Unlike food, metals didn't spoil. Nations eventually started using coins made of gold and silver for trade. But carrying heavy coins wasn’t ideal, especially for long trips. The solution? The first form of paper currency: gold-backed notes. These notes said, “I owe you this much gold,” making trade more efficient and safer.
The Dawn of Paper Currency
The idea of paper currency spread quickly. It was well-organized in 1154 in China, where people deposited gold and received paper backed by the gold in banks. Marco Polo later brought this concept to Europe in the 13th century, and soon, paper money became the norm in trade. Countries backed their currencies with gold reserves, a system called the "Gold Standard." If a nation wanted to print more money, it had to acquire more gold first. By the 19th century, the British Pound Sterling—the most widely traded and trusted currency—dominated global trade. With 60% of trade transactions in pounds, the UK’s influence skyrocketed. But world events soon reshaped everything.
How World Wars Changed the Game
The First World War drained Great Britain. By 1913, the UK borrowed over 7.8 billion pounds to fund the war, depleting its gold reserves. Meanwhile, the United States stayed neutral at first, selling weapons and supplies to warring nations and amassing its gold reserves. By the end of World War I, the US had accumulated vast amounts of gold, strengthening the dollar. Fast forward to World War II, and Europe was left in ruins again. The economies of the UK, France, and Germany were shattered. On the other hand, the US emerged stronger and richer, holding nearly 70% of the world’s gold reserves. In 1944, representatives from 44 nations met in Bretton Woods, New Hampshire, to rebuild the shattered global economy. The US proposed a bold idea: make the dollar the global reserve currency. Each country would back its currency to the dollar, and the dollar, in turn, would be backed by gold at a fixed rate of $35 per ounce. This marked the beginning of a new order.
How Oil Tied the World to the Dollar
By now, the dollar was king, but the US wasn’t about to stop. In the 1940s, the US struck a deal with Saudi Arabia to sell oil exclusively in dollars. The "petrodollar" was born. Other oil-exporting nations followed Saudi’s example, obligating countries worldwide to hold US dollars if they needed oil—an essential resource for modern economies. Imagine this: if Japan wanted oil, it couldn’t pay in yen; it had to convert yen into dollars first. This forced countries across the globe to keep US dollars in their reserves. Demand for the dollar shot up, locking the global economy even tighter to American influence.
Nixon Shock: Breaking the Gold Connection
For almost 30 years, other nations trusted that they could exchange their dollars for gold. But by the late 1960s, the US started printing more dollars than it could back with gold. Foreign nations got suspicious and began converting their dollars into gold. Facing a depletion of gold reserves, President Nixon made a shocking announcement in 1971: the US would no longer exchange dollars for gold. This "Nixon Shock" meant the dollar was no longer tied to any tangible resource like gold. It relied solely on trust. Despite the uproar, most countries continued using the dollar because they lacked an alternative.
The Growing Weaponization of the Dollar
Today, the US dollar is used in 88% of global trade. But this dominance has also turned the dollar into a weapon. The US imposes sanctions on countries, cutting them off from financial access. This affects international trade, freezes assets, and isolates nations economically. The SWIFT banking network—a system that handles global financial transactions—adds to this power. If the US bans a nation from SWIFT, it’s like cutting off their oxygen supply. For instance, sanctions on Iran and Russia crippled their trade and finances, showing how the dollar’s dominance provides the US with control far beyond its borders.
The Push for De-Dollarization
Many nations are trying to reduce their dependence on the dollar. China, Russia, Brazil, and others are exploring alternatives. Some have started trading in their local currencies, while others, like Saudi Arabia and China, conducted oil transactions in Chinese yuan for the first time. India and the UAE have also signed agreements to trade in their own currencies. The BRICS nations—Brazil, Russia, India, China, and South Africa—are even discussing a shared currency to bypass the dollar. But despite these efforts, dethroning the dollar remains a massive challenge. The intricate financial systems built around the dollar aren't easy to replace overnight.
Why the Dollar Is Still the Global Currency
The dollar’s dominance boils down to trust, history, and a lack of alternatives. After World War II, the US strategically positioned itself as the financial backbone of the world. Oil trading in dollars created an unshakable reliance on the currency, while US economic and military strength ensured its influence. Even today, as countries seek alternatives, none have succeeded in creating a system as widespread and trusted as that of the dollar. This makes the US dollar the cornerstone of the global economy, for better or worse. In the end, the story of the dollar is about power and control as much as it is about currency. Whether or not this dominance continues, the dollar's role in shaping global trade and politics is undeniable.