The Power of the United States’ Dollar

Money is the intermediator between buyers and sellers that have the legal backing of the state.

Before World War II, countries backed their currency with the amount of gold deposited in their central banks so the currency represented the worth of the state’s economy.

Britain attempted to reinsert its economic dominance by establishing the gold standard to make the sterling pound the global currency. However, the British economy was not strong enough to dominate other economies.

However, after the Second World War, the economies of Western Europe and East Asia were ruined, and the global market was non-existent therefore to stimulate trade, leaders across the world agreed at the Bretton Woods meeting, a single currency should be used that is backed by gold as a standard for exchange.

Thus, the American dollar was used because the American economy was left unscratched from the World Wars and had a strong liberal economy with a large gold reserve to establish the gold standard.

In other words, the US dollar was used as a benchmark for currency exchange so if the Chinese Yuan wanted to exchange their currency with another state to buy goods, the state first had to buy US dollars and then convert the dollar to the foreign currency they wish to exchange it too.

This system came to be known as the Bretton Woods system which helps stimulate trade and economic growth for the redevelopment of the global market.

Nevertheless, after many years of economic growth, Western economies started to stagnate with high inflation which led to high unemployment.

Governmental intervention did not solve this problem, therefore, in light of the costly Vietnam War, President Nixon abandoned the gold standard to increase the state’s borrowing and spending.

As a result, currencies were floating against each other but instead of returning to the past methods, states opted to continue using the US dollar as the benchmark for exchange because states already have large reserves of US dollars in their country.

Hence, a large supply and demand for the dollar continued American dominance of the global market where Britain failed in the past.