How the U.S dollar came to have a central role in the world economy ?

 

MONEY- The Secret Story. (Part 2)

The United States Dollar refers to the national currency of the U.S. It is considered as a standard currency and the most widely used currency in international transactions. According to International Monetary Fund more than 60% of all foreign bank reserves is in the U.S dollars.

So the question is.... 

How did the U.S dollar became the king of all currencies?

 ➠ History of the United States dollar:-

⟶ As you know, the U.S didn't exist in the 1600s, it was owned by the British, French and Spanish empires.

⟶ The British Emperor's territories, the 13 colonies were located in north America.

⟶ Earlier the colony of South Carolina (one of the 13 colonies) enacted a law, that made rice an acceptable means for paying taxes. but the difficulty of shipping rice around was a pain, So to solve the difficulty South Carolina eventually created rice paper note (paper money backed by rice). And to make this even more crazier  #Tobacco rich colonies like Virginia, used tobacco instead of rice to backed its paper money. 

⟶ At various times in different colonies paper money was issued and had disputes with the British government.

⟶ In 1765 the Britain was suffering a sever recession and they thought they could raise money by taxing its colonies. Britain's idea was to say that, these colonies had to pay tax to print their paper money and the money could only be printed in London. This was called The Stamp Act. 

⟶ All the 13 colonies were unhappy with this and in 1767 they took the Spanish system for currency base and the 1st short of revolution were fired.

⟶ In 1775 these 13 colonies were complete broke. 

How could they pay for this expensive war?

➤ The solution was The Continental Dollar. 

⟶ This would be the 1st unified paper currency of the original 13 colonies and by the end of November 1775, almost 75% of 13 places money was The Continental dollar.

⟶ On 4th July 1776, the 13 colonies sign the declaration of independence as a symbol of their intention to break free from Britain.

➤ When the U.S.A won the independence from Britain, the 1st article of the constitution gave government the exclusive rights to Print/coin money. and in 1792_The Coinage Act ratified the dollar as the official currency of the USA. the dollar were fixed to gold.

➤ Basically on The Classical gold model, were each unite of currency is backed by an equivalent amount of gold in government treasury.

⟶ In 1869, Centralized printing begins in the Bureau of Engraving and Printing. Earlier money was printed by private bank.

💥 In 1913, The Federal Reserve Bank created to respond to the unreliability and instability of a monetary system that was previously based on banknotes issued by individuals banks, and also make sure enough currency was in circulation.

⟶ Then came 1914, when the 1st world war broke down and many countries abandoned the gold standard so that they could pay their military expenses, which devalued their currencies.

⟶ In the world war-1, First 4 years the USA was selling weapons, supplies, raw-materials and other goods to its Allies and collecting much of the payments in gold. 

• In 1916, During war Britain bought more than a quarter of the engines for its new air fleet, more than half of its shell casings, more than two-thirds of its grain, and nearly all of its oil from foreign suppliers, with the United States heading the list.

• Three years into the war, Britain, which had steadfastly held to the gold standard to maintain it's position as the world's currency, found itself having to borrow money for the first time.

• This time the US economy overtook the United Kingdom to become the largest economy in the world.

⟶ It was the boom period of American economy from 1921 to 1928, the actual standard of living in US did increased and taxes were reduced as well. This is due to conservative fiscal policy.

⟶ But Unfortunately, At the same time something were interfering with the economic growth, and it was the Fed's policy of flooding the market with cheap money, Thus disrupting production processes and causing massive malinvestment. During this period the money supply increased from 45.3 billion dollars to 73.26 billion dollars  (61.8% of increase) and this increase in not caused by printing money but by credit expansion called The Fractional Reserve System.

   Then came 1921, The Great Depression, 

⟶ The Great Depression had, a profound effect on the monetary policy world wide but the sharpest and most painful in American history. Total industrial production may have dropped by 30 percent. Unemployment spiked at close to 12%. Overall price decreased rapidly at the steepest rate ever recorded.

⟶ Then, after 18 month of extremely hard times, the US economy started to improve and, By 1923, the US had returned to full employment.

⟶ In a way, The Great Depression was a good preparation for what was to come :- Americans had learned to scrimp and persevere. and then World War II started on September 1, 1939, with the German invasion of Poland.

👉 World War II proved to be a valuable investment in American economy. Many businesses moved from the production of consumer goods to the production of war supplies and military vehicles. American companies began producing guns, planes tanks and other military equipment at an unbelievable rate. And by 1945, the United States was manufacturing more than half of the produced goods in the world. US exports made up more than one-third of the total global exports. And collecting much of the payments in gold, as a result By the end of the World War II, United State held roughly two-third of the world's available gold reserve.

👉 It was cleared during the Second World War that a new international system would be needed to replace the Gold Standard after the war ended. the design for it drawn at the Bretton Wood Conference in the US in 1944.

What is the Bretton Wood System?

On 1st July 1944, As the battles of 2nd world war raged in Europe and the Asia pacific, delegates from 44 nations met at the secluded Mount Washington Hotel in Bretton Woods, New Hampshire to participate in what became known as the Bratton Wood Conference.

⟶ The idea was, Currencies of all 44 nations would be backed by US Dollar and the US Dollar would backed by the gold.

⟶The Bretton Wood system set up a fixed exchange rate system based on gold. Dollar were the only currency convertible into gold and the value of the dollar to gold at $35 an once. Other countries then fixed their exchange rate to the dollar. This gave confidence to all currency and gave the world stability.

Two institution were created :- 

• The International Monetary Fund to ensure the stability of international monetary system and exchange rates and address countries' external imbalance.
• The World Bank to help rebuild economy after the war and contribute to development.

⟶ The US Dollar became "International Reserve Currency" the main currency the world uses to trade.

⟶ The Bretton Wood System worked well during 1950-70. but it came under strain as the US started printing and spending a large amount of dollars on post-war reconstruction efforts. and countries holding these dollar started exchanging it with gold, the US gold reserve started vanishing. And so, in 1971, President Nixon arranged a divorce between the dollar and gold. and suspended the convertibility of dollar into gold. 

#Literally all currencies became Fiat Currency but the dollar still remains the international reserve currency.

⟶ Fiat currency means currency backed by nothing. previously all currencies were backed by the US dollar and US dollar were backed by gold but after 1971 all currencies backed by US dollar and US dollar is backed by nothing.

This is the end of Money- The Secret Story (Part 2).

Click here for 👉 Money- The Secret Story (part-1).

Thank you, Stay Happy and Safe...😊