World reserve currencies

When nations trade and save, they need a common money to price oil, settle debts and hold in their vaults. Across history one currency at a time has played that role — the world reserve currency — and holding it confers immense, and temporary, power.

A relay race of empires

The dominant trading power’s money tends to become everyone’s money. Historians trace a rough succession: Portugal, then Spain, the Dutch guilder, French livre, British pound sterling — and, since the mid-20th century, the US dollar. Each reign lasted roughly a century before the next power’s money took over.

How the dollar won: Bretton Woods, 1944

As the Second World War ended, the Allied nations met at Bretton Woods and designed the post-war system around the United States, which held most of the world’s gold. The deal:

• The US dollar was pegged to gold at $35 an ounce, redeemable by foreign governments.
• Every other currency was pegged to the dollar.
• So the dollar became the world’s reserve — “as good as gold”, and easier to hold.

Nations parked their savings in dollars and US Treasury bonds rather than metal. The dollar sat at the centre of global trade and finance, a position it still holds.

The crack in the design

Bretton Woods carried a fatal flaw. The US promised foreign governments they could always redeem dollars for gold — but it kept printing dollars to fund domestic spending and the Vietnam War, far beyond the gold it actually held. Sooner or later, other countries would notice there were far more dollars abroad than gold in Fort Knox, and start cashing in. When France and others did exactly that, the whole arrangement came to a head on a single day in 1971. That’s the next lesson.