How the Dollar Became the World’s Reserve Currency

When it comes to international monetary finance, most people don’t give too much thought to the reserve currency that is used to anchor all the world’s currencies and serves as a monetary benchmark on which to base global value. Today, in 2020, the American dollar has held sway as the globe’s premiere for the past three-quarters of a century, but that has not always been the case. Indeed, throughout the nineteenth, and the first half of the 20th-century, the British Pound Sterling was awarded this place of privilege amongst currencies.

How did the British Pound Sterling obtain that stature in the 1800s, and how did the American dollar come to supplant that dominance by 1945? That answer is important for understanding the impact that reserve currencies can have on trade and monetary policy around the world.

The Rise of the British Pound Sterling

The notion of a “reserve currency” is only a couple hundred years old, which is a relatively short time when placed against the backdrop of the millennia of human trading and interaction that preceded this modern, global currency system.

Until the 18th-century advent of the British Empire, and the economic juggernaut that it became, there was no currency that dominated the entire globe. It took a combination of technological advances, such as navigational aids, and military prowess to move away from an older mercantilist system that acted as a barrier to the notion of a reserve currency. No other nation-state had the economic wherewithal to assume the position of dominant global currency until the British Empire.

Eventually, other nations used the British Pounds Sterling as the medium of exchange and they would work towards buying those pounds for that purpose. The allure of reserve currencies is found in their stability and reputation; the British Pound was renowned for both of those qualities.

As an example, take the case of a long-time British rival, France. By the mid-19th-century, Britain and France reconciled over unpleasant conflicts such as the 100-Years War and the Napoleonic Wars. Both nations were seen as proud rivals on the global stage. Still, when French citizens traded on the world market, they used British Pounds as the most respected currency with banks and merchants across the globe.

Decline of the Pound

So what happened? Two global cataclysms sent the British Empire on a downward trajectory during the first five decades of the 20th-century. Those were the ominously named World War One, and the even deadlier sequel, World War Two. Although Britain was victorious in both of those conflicts, the cost of the two wars taxed the empire to the breaking point.

Coupled to the growing rise of anti-colonialism that came in the wake of the Axis 1945 surrender, the fate of London’s sprawling domains was a foregone conclusion. As nature, and finance, abhors a vacuum, a new player, the American dollar replaced the British Pound by the end of the war.

This reality was acknowledged and formalized prior to the Axis collapse. During the month of July 1944, delegates from more than forty nations met to hammer out the eventual post-war international monetary system and owing to the United States economic preeminence, the administration of Franklin Roosevelt largely dictated the proposed terms at what history would come to call the Bretton Woods conference.

Bretton Woods: Changing of the Guard

Roosevelt looked in askance at the collapse of the world monetary system following the devastation of the First World War. Leaders wanted to build a system that would not lead to the grievances that saw the rise of fascist governments in Rome, Berlin, and Tokyo.

The two key components of the agreement created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). Having witnessed the deadly consequences of unfettered competition amongst nations, these delegates believed that trade and cooperation would be the hallmarks of peace going forward. The American dollar would underpin those efforts as the world’s reserve currency.

Threats to the Dollar’s Reserve Status

Flash forward 75 years to today. In 2020 the United States dollar is not nearly as unassailable as it was in 1944. Indeed, rumbles have been heard for more than 20 years regarding plans, schemes, and a desire to topple the dollar as the world’s reserve currency.

Alas, those efforts remain just that at the moment. According to the IMF, more than 60% of all foreign banking reserves remain denominated using American dollars. Despite turbulent politics, deficit spending, mounting foreign debt, and an unbridled urge to print money, the United States dollar remains perched upon its lofty peak.

The one nation-state that might one day assume the mantle is China. Based on basic observation, China is the only economy with the potential of achieving that goal. That being said, however, goals can be elusive and China is finding that out much to its chagrin. Given Beijing’s opaque tradition towards transparency, financial leaders fear that the Yuan could be devalued at a moment’s notice, putting the brakes on Chinese aspirations.

Similarly, the reputation and power of the Euro have been dulled in the aftermath of the sovereign debt crises that unfolded in 2009, as well as the ongoing immigration crises that wrecked the continent as recently as 2017. These uncertainties have placed any European Union aspirations on the back burner as other financial leaders fear future currency volatility.

For these reasons, the American dollar is still the “gold standard” of global economies. In a world of asymmetrical threats, some question whether cryptocurrency might snag reserve status as the alternate currency gains ground with societal mainstream.

Could Cryptocurrency Become the World’s New Reserve Currency?


Consider that at one point in history, the American economy was limited to localized commerce due to being hemmed in by geography that only decades of technology managed to overcome. During that time, incremental steps were taken. One thinks of President John Quincy Adams “National Road,” designed to commercially link the American east coast with the Old Northwest Territory.

Similarly, the Erie Canal transformed the way goods and services were delivered in the second quarter of the nineteenth century, and steam and railroads knitted the economic whole together, which would provide the preeminent economy in the 1944 Bretton Wood conference.

But what of cryptocurrency? As it happens, the federal government is very wary of the possibility that crypto might topple the dollar.

So much so that, according to Forbes Magazine, the United States Office of National Intelligence has highlighted the concern stating, “many cryptocurrency enthusiasts predict that either a global cryptocurrency, or a national digital currency, could undermine the US dollar…the United States should prepare for scenarios that threaten to undermine the US dollar as the world reserve currency.”