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The US dollar as the world’s reserve currency

In 1931 President Roosevelt confiscated all privately held gold in the United States. After the confiscation, the US government offered to pay first $17 an ounce and then later, in 1934, $35 an ounce for foreign gold. A substantial portion of the gold in the world was sold to the United States and every dollar outside the US was convertible into gold. It was these two elements, the fact that the US owned a large percentage of the gold and the fact that the dollar was convertible into gold that enabled the US dollar to become the reserve currency of the world.

In 1971 when President Nixon reneged on the US’s promise of conversion it was too late for the rest of the world. There were too many dollars out there already and besides, no other major country’s currency was then still backed by gold so there wasn’t any quick substitute for the dollar as an international reserve currency. At that point it was also impossible for politicians to convert back to a gold standard, as it would have required astronomical gold prices. So the US dollar remained the reserve currency, not because of the US’s huge economy, or its monetary and fiscal policies, but merely as a remnant of the time when the US owned the most gold and the dollar was convertible into gold.

http://www.paulvaneeden.com/Understanding.the.gold.price

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