For more than sixty years the United States dollar has been the central reserve currency for the world. A reserve currency, also referred to as an anchor currency, is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves (Carbaugh, 2011). As the world’s reserve currency, the U.S. dollar is used throughout the world as a medium of exchange and is used as the global currency for products traded within the global market. In recent years the status of the U.S. dollar has been contested by a select few around the world. Leaders are unconvinced about the future of the United States economy as their deficits are exceeding record highs. The following analysis will discuss the history of the world reserve currency, how the U.S. dollar became the controlling currency and the benefits the U.S. has experienced as a result of having the controlling currency. Presenting analysis will also discuss the cause of mounting concerns over the future of the United States as well as the effects if the dollar was to lose its status as the world’s reserve currency. Finally, alternatives for the dollar will be evaluated as well as what the United States can do to maintain the standing of the dollar.
History of World Reserve Currency
During the 1800’s and the first half of the 1900’s the British Pound served as the foremost world reserve currency. Due to WWII Great Britain accrued a high amount of debt and lost its status as the world reserve currency. As the British Pound was decreasing in value, the U.S. economy became stronger after the war due to a considerable inflow of Gold into the states and rapid economic development.
After WWII the international finance system was governed by the Bretton Woods Agreement of 1944. This agreement established rules and procedures to regulate the global financial system by accepting the U.S. dollar as the world’s reserve currency. The U.S. dollar was selected due to the performance and stability of the U.S. economy. Once the Bretton Woods Agreement ended in the 70’s, the U.S. dollar continued to be the world reserve currency as it was considered by foreigners as a sound investment and provided higher rates of return. The U.S. economy was viewed with having stability and the strength to back the dollar. It is now estimated that two thirds of all currency held in reserves is made of U.S dollars while the next closest is the Euro, which makes up about one fourth of the currency held as reserves (Greenwood, 2009, para. 1).
U.S Benefits from Strong Dollar
The U.S. dollar was considered one of the strongest of the major currencies and was also considered a safe investment for foreigners during uncertain periods. Global investors were driven to invest in U.S. assets as they believed they were purchasing sound investments that were also providing a higher rate of return. Over the years both the U.S. government and U.S. citizens have reaped the...