ECONOMICS MACROECONOMICS

How the U.S. Dollar Became the World's Reserve

Currency
By RICHARD BEST Updated September 22, 2021

Reviewed by ROBERT C. KELLY

The first U.S. dollar (USD) is one of the world's strongest currencies. It is the official currency of
the United States as well as several other countries. Although it has a deep-rooted history in
the United States, the dollar as we know it today was first printed in 1914. [1]

Printing began a year after the establishment of the Federal Reserve as the nation's central
bank with the passing of the Federal Reserve Act. [1] That's when the Fed started issuing
Federal Reserve notes in $10 denominations featuring Andrew Jackson's portrait. [1] Three
decades later, the dollar officially became the world’s reserve currency. However, its
ascendancy to the throne actually began not long after the ink was dry on that first printing in
1914. Keep reading to learn about how the dollar became the world's reserve currency.

KEY TAKEAWAYS
The first U.S. dollar was printed in 1914 after the Federal Reserve Bank was created.
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The Allies paid the U.S. for supplies in gold during World War I, propelling the U.S. to
become the largest holder of gold.
Countries pegged their currencies to the dollar after the war, ending the gold
standard.
The International Monetary Fund reported that 59% of all foreign bank reserves are
denominated in U.S. dollars.
Despite its position in the global markets, the U.S. isn't the strongest world currency,
ranking 10th on the list.

History of the U.S. Dollar

The first documented use of paper currency in the U.S. dates back to 1690 when colonial notes
were issued by the Massachusetts Bay Colony. These notes were used to fund military
operations. It wasn't until 1776 that the first $2 bill was introduced—nine days before
independence. Nine years later, in 1785, the U.S. officially adopted the dollar sign, using the
symbol for the Spanish American peso as a guide. [1]

In 1863, the government established the Office of the Comptroller of the Currency (OCC) and
the National Currency Bureau. These two agencies were charged with handling new
banknotes. Centralized printing begins at the Bureau of Engraving and Printing in 1869. Prior
to this, money was printed by private companies. [1]
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The U.S. Treasury assumed the official responsibility of issuing the nation's legal tender in
1890—more than a decade before the creation of the Federal Reserve and the dollar as we
know it today. [1]

FAST FACT
Martha Washington's image was printed on the 1886 and 1896 series of $1 silver
certificates. [1]

The Gold Standard

The Federal Reserve Act of 1913 created the Federal Reserve Bank to respond to the
unreliability and instability of a currency system that was previously based on banknotes
issued by individual banks. This was the same time that the U.S. economy became the world’s
largest, surpassing that of the United Kingdom. World commerce still centered around the
U.K., though, as the majority of transactions took place in British pounds. [2]

The majority of developed countries pegged their currencies to gold as a way to stabilize
currency exchanges. But when World War I broke out in 1914, many countries suspended their
use of the gold standard to pay their military expenses with paper money, which devalued
their currencies. Britain, though, held to the gold standard to maintain its position as the
world’s leading currency and found itself borrowing money for the first time during the third
year of the war. [3]

The United States became the lender of choice for many countries that wanted to buy dollar-
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denominated U.S. bonds. Britain finally abandoned the gold standard in 1931, which

decimated the bank accounts of international merchants who traded in pounds. [4] By then,
the dollar replaced the pound as the leading international reserve currency. [5]

The Bretton Woods Agreement

As it did in World War I, the U.S. entered World War II well after combat began. Before it
entered the war, the United States served as the Allies’ main supplier of weapons and other
goods. Most countries paid in gold making the U.S. the owner of the majority of the world's
gold by the end of the war. This made a return to the gold standard impossible by the
countries that depleted their reserves.

Delegates from 44 Allied countries met in Bretton Wood, New Hampshire, in 1944 to come up
with a system to manage foreign exchange that would not disadvantage any country. The
delegation decided that the world’s currencies would no longer be linked to gold but could be
pegged to the U.S. That's because the greenback was, itself, linked to gold. [6]

The arrangement came to be known as the Bretton Woods Agreement. It established the
authority of central banks, which would maintain fixed exchange rates between their
currencies and the dollar. In turn, the United States would redeem U.S. dollars for gold on
demand. Countries had some degree of control over currencies in situations wherein the
values of their own currencies became too weak or too strong relative to the dollar. They
could buy or sell their currency to regulate the money supply. [6]

Th U S D ll B h W ld’ R C
The U.S. Dollar Becomes the World’s Reserve Currency Ad

The U.S dollar was officially crowned the world’s reserve currency and was backed by the
world’s largest gold reserves thanks to the Bretton Woods Agreement. Instead of gold
reserves, other countries accumulated reserves of U.S. dollars. [6] Needing a place to store
their dollars, countries began buying U.S. Treasury securities, which they considered to be a
safe store of money.

The demand for Treasury securities, coupled with the deficit spending needed to finance the
Vietnam War and the Great Society domestic programs, caused the United States to flood the
market with paper money. With growing concerns over the stability of the dollar, the countries
began to convert dollar reserves into gold.

The demand for gold was such that President Richard Nixon was forced to intervene and de-
link the dollar from gold, which led to the floating exchange rates that exist today. [6] Although
there have been periods of stagflation, which is defined as high inflation and high
unemployment, the U.S. dollar has remained the world’s reserve currency.

The U.S. Dollar Today

The dollar remains the world's reserve currency today. Central banks held 59% of their
reserves in U.S. dollars during the fourth quarter of 2020, according to the International
Monetary Fund (IMF). [7] Many of the reserves are in cash or U.S bonds, such as U.S. Treasuries.
Dollar-denominated debt outside the U.S. continues to rise, with levels reaching $12.6 trillion
as of mid-2020. [8]

Most people would believe that this makes the dollar the strongest currency in the world.
Despite its position in the global markets and how dependent they are on it, the dollar ranked
as the 10th strongest currency, according to CMC Markets. The site ranked the Kuwaiti dinar as
the strongest currency while the British pound and the euro earned the fifth and eighth spots
respectively. [9]
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The Bottom Line

The reserve status is based largely on the size and strength of the U.S. economy and the
dominance of the U.S. financial markets. Despite large deficit spending, trillions of dollars in
debt, and the unbridled printing of U.S. dollars, U.S. Treasury securities remain the safest way
to store money. The trust and confidence that the world has in the ability of the United States
to pay its debts keep the dollar as the most redeemable currency for facilitating world
commerce.

When Was the American Dollar Created?

The history of paper currency in the United States dates back to colonial times when
banknotes were used to fund military operations. The first U.S. dollars as we know them
today, though, were printed in 1914. This was a year after the Federal Reserve Act was
established.

When Did the U.S. Dollar Become the Global Reserve Currency?
The U.S. dollar became the official reserve currency of the world in 1944. The decision was
made by a delegation from 44 Allied countries called the Bretton Woods Agreement.

Which Country’s Currency Could Be the Next World Reserve Currency?

There are a series of alternatives that could replace the dollar as the next global reserve
currency. The euro is the most used reserve after the dollar and could replace the dollar if
economic conditions move in its favor. But the European Union (EU) does lack a central
Treasury unit, which can make this difficult. China's renminbi could surpass the dollar, a goal
that the country's leaders are keen on realizing. Global reserves account for about 2% and the
use of the renminbi around the world is rising. [10]

ARTICLE SOURCES
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Related Terms
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U.S. Dollar Index (USDX)
The U.S. dollar index (USDX) is a measure of the U.S. dollar's value relative to the majority of its most
significant trading partners. more

What Is a Reserve Currency?

A reserve currency is held by central banks and other major financial institutions in large quantities for
major investments, transactions and international debt obligations. more

What Does USD Stand for?

The USD is the abbreviation for the U.S. dollar, the official currency of the United States of America and
the world's primary reserve currency. more

Federal Reserve Note

Federal Reserve notes are debts issued by the Federal Reserve that circulate as legal tender in the U.S.
more

Special Drawing Rights (SDRs)

Special drawing rights are monetary reserve currencies created by the International Monetary Fund.
more

The First Bank of the United States

Understand The Creation, Role, and Impact of the First Bank of the United States more

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