If all worldwide fiat currencies were ranked by usage, total money supply and reputation there is little doubt over which currency would come out on top. Over the last 40 years, the US Dollar has become the leading currency in the world.
There is currently over 1.5 trillion US dollars in circulation; most of this in paper notes.
Not only is the currency used domestically, but the value of transactions carried out abroad is staggering. That’s because the US Dollar often takes a relaxed position as a replacement currency if another currency suffers from extreme devaluation known as hyperinflation.
Hyperinflation doesn’t indicate a problem with the real economy – it points to a problem in how a currency is being managed. Hyperinflation is the natural byproduct of aggressive money printing by governments after unsustainable public spending.
If citizens begin using US Dollars instead of a broken currency, the problem of hyperinflation is fixed almost overnight, because the inherent value of a US Dollar is not affected by the woes of a minor economy, and those who negligently managed the monetary situation locally have no control over the US Dollar.
The 20 US Dollars in the pocket of a child in Ecuador could be used to buy a meal in the United States themselves. This interchangeability ensures that the buying power of US Dollars in foreign territories should not encounter the same inflationary issues that the domestic currency had.
The global reserve currency
Official use of the US Dollar was encouraged by the Bretton Woods Agreement which was an accord signed in 1944. This enabled countries to use the US as the world’s global reserve currency. From this position of international renown, it is unsurprising that some 11 countries have since turned to the currency when looking for a new official currency.
Using the US Dollar in a non-US country doesn’t come without its woes. Similar to the usage of the Euro by most European Union nations, usage of a shared currency means centralising the power to control of monetary policy in a central body that will only make decisions on behalf of the whole. This means that the money supply will not be expanded or tightened in response to a macroeconomic issue.
This loss of control is why the United Kingdom retained their own currency Pound Sterling when joining the EU in 1972.
Healthy economic growth
Why did the US Dollar have the qualities needed to become a global reserve currency in the first place, and why has it remained at the top of the table?
Financial Experts point to the size and might of the US economy itself. The US economy is the powerhouse in which the currency is put to work. Its healthy growth over many decades (attributed to free markets, an entrepreneurial mindset, tech hubs and good levels of education) have meant that the future of the Dollar has never been in question.
Consistent monetary policy
The US Dollar supply is controlled by the US Federal Reserve, based in Washington D.C. This is not to be confused with regional bodies such as the New York Federal Reserve – which is sometimes mistaken for the national body due to its location in the financial epicentre of the US.
The chair of the Federal Reserve is a political appointment, but the role demands that the holder acts impartially and in the best interest of the country, rather than to serve the interests of the White House at the time.
The role has been undertaken with due care, resulting in steady inflation and predictable changes to rates over the last few decades. This assists the US Dollar’s predictability because often the biggest reason for foreigners seeking to hold another currency is when fleeing to safety.
Overall – history repeats itself
At this point in our modern history, the past performance of the US Dollar begins to reinforce its position as the number one currency. It’s number one because people associate stability with the largest and most dominant currency. This means that during times of turmoil, investors will still flock to the US Dollar, which in turn supports its value and further perpetuates its stable characteristics.
