In the late 1960s and early 1970s, the system suffered setbacks ostensibly due to problems pointed out by the Triffin dilemma-the conflict of economic interests that arises between short-term domestic objectives and long-term international objectives when a national currency also serves as a world reserve currency.Īdditionally, in 1971 President Richard Nixon suspended the convertibility of the USD to gold, thus creating a fully fiat global reserve currency system. Under this system, the United States dollar (USD) was placed deliberately as the anchor of the system, with the US government guaranteeing other central banks that they could sell their US dollar reserves at a fixed rate for gold. Here, they meet at the inaugural meeting of the International Monetary Fund, 1946.Īfter World War II, the international financial system was governed by a formal agreement, the Bretton Woods system. John Maynard Keynes (right) and Harry Dexter White helped to draft the provisions of the post-war financial system. Speculative attacks on the pound forced Britain entirely off the gold standard in 1931. This led to relative stability, followed by deflation, but because the onset of the Great Depression and other factors, global trade greatly declined and the gold standard fell. The British Gold Standard Act reintroduced the gold bullion standard in 1925, followed by many other countries.
Īttempts were made in the interwar period to restore the gold standard. British banks were also expanding overseas London was the world centre for insurance and commodity markets and British capital was the leading source of foreign investment around the world sterling soon became the standard currency used for international commercial transactions. At that point, the UK was the primary exporter of manufactured goods and services, and over 60% of world trade was invoiced in pounds sterling. The British pound sterling, in particular, was poised to dislodge the Spanish dollar's hegemony as the rest of the world transitioned to the gold standard in the last quarter of the 19th century. It was therefore the Dutch which served as the model for bank money and reserve currencies stabilized by central banks, with the establishment of Bank of England in 1694 and the Bank of France in the 19th century. The Dutch, through the Amsterdam Wisselbank (the Bank of Amsterdam), were also the first to establish a reserve currency whose monetary unit was stabilized using practices familiar to modern central banking (as opposed to the Spanish dollar stabilized through American mine output and Spanish fiat) and which can be considered as the precursor to modern-day monetary policy. While the Dutch guilder was a reserve currency of somewhat lesser scope, used between Europe and the territories of the Dutch colonial empire from the 17th to 18th centuries, it was also a silver standard currency fed with the output of Spanish-American mines flowing through the Spanish Netherlands. It was the Spanish silver dollar, however, which created the first true global reserve currency recognized in Europe, Asia and the Americas from the 16th to 19th centuries due to abundant silver supplies from Spanish America. The Venetian ducat and the Florentine florin became the gold-based currency of choice between Europe and the Arab world from the 13th to 16th centuries, since gold was easier than silver to mint in standard sizes and transport over long distances. International currencies in the past have (excluding those discussed below) included the Greek drachma, coined in the fifth century B.C.E., the Roman denari, the Byzantine solidus and Islamic dinar of the middle-ages and the French franc.
Reserve currencies have come and gone with the evolution of the world’s geopolitical order. Currencies pegged to the euro w/ narrow band Currency symbols of the four most widely held reserve currencies, L–R: United States dollar, Euro, Japanese Yen, Pound Sterling History
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