Game of Currencies: The Rise and Shine of US Dollar as a Global Currency

It is true that “Money makes the world go round” but is it really money or the US Dollar? Let’s say that you are a cotton exporter and you want to export it to China, you get paid in the US Dollar. Or say that you are a car manufacturer and you import the engine components from China, you pay in the US Dollar. Every country apart from the United States has two important currencies, one that people use among the citizens and the other they use to trade, which is the US Dollar. According to the International Monetary Fund, the US Dollar has been the most popular currency, making up to 60% of the foreign exchange reserves of all the known Central Banks. But has dollar always been the global currency? Well no! Let me take you through the story of how was it crowned as a global currency.

Since the beginning of the 19th century, countries struggled to find better ways to settle trade balances. Up until World War I, most countries agreed to settle their trade deficits through the exchange of gold. The Gold Standard Act officially placed the United States on the gold standard, committing the United States to maintain a fixed exchange rate in relation to other countries on the gold standard. This lasted till 1919, when World War I forced both the United States and Britain to suspend it, so that countries could print more money to finance the war, and hence they stopped converting their currencies to gold. It is the 1930s, gold has lost its status of the common anchor between nations and this lead to the collapse of financial system globally. This also became one of the reasons for the Great Depression later. So now we know how important it is, to have a common currency!

Countries had almost stopped trading with each other before the war. Firstly, because of the Great Depression, the countries had put up huge trade barriers to protect domestic industries. And there was a bigger problem, ‘The world had gone off the gold standard’. It was during the end of World War II that countries realized they no longer knew how to trade with each other without a common anchor like gold, the countries then decided to collaborate with each other and establish a global financial system. And hence in the year 1944, representatives from 44 nations decided to gather together in the Small town of Bretton Woods, New Hampshire to decide ‘What is next?’. The principal goals of the meeting in Bretton woods were that of creating an efficient system of foreign exchange, preventing competitive devaluations on the currencies and also promoting international economic growth. The Agreement also created two prominent organizations – the World Bank and the International Monetary fund which stand as pillar to the global financial system and for the exchange of international currencies till date. Brace yourself for a ride on what exactly happened in Bretton woods!

It was the end of World War II and the great economic minds of the world came together at Bretton Woods to figure out the ways to promote trade in the post war world, and finally it came down to two different plans by two different people. One among them was John Maynard Keynes, the biggest celebrity economists in the World, who came into the conference worried about Britain’s place in the world and the most that he could hope for was a new currency system that does not put the Americans in charge. He pioneered the idea of creating an International Clearing Union (ICU) to keep an account of imports and exports of a country. Keynes suggested that the world needs to create a NEW International currency to replace gold. He suggested that every nation could still continue using their own currency, but when they trade with other countries, they would be using this brand new currency which he named Bancor (French for Bank Gold). His idea was that when a country trades with another country, it would use Bancor and there would be a Central Bank of the world that would keep a track of all the Bancor. And this new currency was a better idea for Great Britain because Britain had sold most of its gold to fund the war.

Keynes’ rival was an American, Harry Dexter White, the architect of the dollar’s privileged place in the Bretton Woods monetary system. Though Keynes was the outstanding personality at Bretton Woods according to an attendee, it was White who actually ran the show. White’s plan did not involve creation of a new currency, rather envisaged a more modest lending fund and a greater role for the U.S. dollar. White knew that the best way he could envision this would be to somehow get all the new international rules that all the countries at Bretton Woods were going to sign, to include dollar somehow. That way every country would then have to use dollars. Benn Steil in his book “The Battle of Bretton Woods” mentions how White, in the later hours of the conference, along with his assistants of the technical team replaced the phrase “gold” with “gold and US dollars” in the agreement, thereby enshrining the US Dollar as the international medium of exchange. Keynes later confessed that he had not read the final version of the document that he signed.

Harry Dexter White and John Maynard Keynes at the Bretton Woods Conference in 1944.

The Dollar is the global currency from the past 75 years, but will it always prevail? Considering the plight of US economy following the coronavirus pandemic, and meanwhile China that led the world economy into slowdown has the advantage of leading it out. The data points coming out of Chinese economy suggest that it is improving at a much better pace than the US. Will the coronavirus lead to the end of dollar supremacy? Only time will tell.