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Why is the US dollar always considered the global benchmark?

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Akshata Kamath
Akshata KamathJul 15, 2022 | 20:17

Why is the US dollar always considered the global benchmark?

The USD is the most prominent currency in the world. Photo: Unsplash

World War 2 was a time when all major economies were busy buying arms and ammunition from the US. Though the war exhausted the reserves of most countries, the US had minted tonnes of gold. As the US was the largest economy by the end of the war and since the USD was a stable currency, it was chosen to be the global currency in 1944 by 44 countries. By the time the US delinked the USD from gold, most nations were used to dealing in foreign trade with US dollars. Thus the monopoly remained.   

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If you have traveled to Singapore or Thailand, you will know this: When you give your Indian rupees at the foreign exchange counter, you receive your Singapore dollars or Thai baht respectively, based on the US exchange rate. This means that the Indian rupee is first converted to USD, which is then converted to Singapore dollars or Thai baht. This also means that the exchange rate of the US dollar decides how many Singapore dollars you can get. 

Also, if you see prices of oil or gold on the stock market, they are all priced in dollars. So, why is the US dollar the benchmark everywhere? Well, it seems like the World War 2 played a major role in deciding this and the habits formed during those years have continued since then.

Here are 9 points that will explain how we got here: 

1. First, let's consider the US economy in itself. In the 1800s, the European countries were much stronger than the US economy (because they had looted many countries and had piled a lot of wealth. Remember how our ancestors had to pay ''do guna lagaan''?

2. But in the 1900s, the tides turned. When World War I began in 1914, Britain was one of the top economies in the world. But it was also the first to jump into the war, which ended at the beginning of 1919. Like the UK, many other major economies had also invested their resources in this war right from the time it began. Now wars are expensive, and they obviously cost the UK and the other economies a lot.

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3. But the US only got involved in the war in 1917. So though it bore losses too, it did not suffer as much as the other countries. By the end of World War II, the US was the biggest economy in the world while the other countries had exhausted a lot of their resources and had the big task of rebuilding their economies. Also, the US had supplied a lot of military equipment to its allies for the war and had collected payments for this in the form of gold. (So the US was collecting most of the world's gold and putting other countries at a disadvantage) 

4. Now, towards the end of World War II in 1944, a Bretton Woods Conference was held where 44 countries came together and decided to make the US dollar the world's official global currency. The 44 countries decided to link their currency to the USD at a fixed exchange rate and it would be every country's responsibility to hold the fixed exchange rate in place. Why? Because the US dollar was stable and strong. Also, the US currency was backed by gold. The IMF and the World Bank were also born at this conference and the focus was to create more global trade. 

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5. Now here's the thing: If 44 out of 106 countries (apparently, there were only 106 countries in the 1940s) make USD the main global currency, they will obviously have to keep some with them. Also, since the countries wanted to create an atmosphere to efficiently conduct global trade with ease, having a fixed exchange rate with a stable USD would make things easier. So, global trading began. Now it is common sense that if 44 countries use USD to trade, the other countries who weren't a part of these 44 countries would have also had to stock up on USD to trade with these 44 countries. Thus, the presence of the USD grew across the globe.

6. Now, over the years, as the other war-torn countries repaid their war-time dues to the US in US dollars, the US had to return the gold to these countries. US's gold stock started dwindling and the US dollar's stability now came to question. Eventually, in 1971, the US stopped backing its currency with gold. So now what currency to follow?   

7. Since the rest of the countries were used to trading in US dollars for all these years, they continued to trade in US dollars. Also, since every other country mostly had US dollars in their foreign reserves, it was easy to trade in dollars and a change would be costly and confusing. After all, the US dollar has been the most used foreign currency that is used for international trade. In 2019, about 88% of international trade across all countries was done in USD and about 50% of the world's debt was in USD. The next most used currency is Euro, but it doesn't even come close to the level and the frequency with which the USD is used. 

8. Since the USD is used by multiple countries in their everyday use, the US has also used this power to control countries. Remember when it sanctioned Venezuela, Iran, and Cuba? The US has banned sanctioned countries from using US dollars for everyday use. This has been done when countries use dollars to fund terrorism or when they do not comply with agreements with the US. This is also a way of stopping other unsanctioned countries from dealing with these sanctioned countries because now they cannot receive or pay in USD while trading.  

9. This has caused unsanctioned countries to create their own currency-backed payment systems with sanctioned countries. For eg: India and Iran have their own currency payment system and INR is not converted to USD. Even when sanctions were levied on Russia, India chose to rely on its independent rupee-rouble payment system.  

That brings this to the question: Will the USD still be the strong apex currency in the future? What do you think?

Last updated: July 15, 2022 | 20:19
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