How the Dollar Became the World’s Reserve Currency

By Colin Dodds · May 24, 2021 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How the Dollar Became the World’s Reserve Currency

The U.S. Dollar bears a lot of responsibility when it comes to global finance. It’s the currency kept on hand by central banks and other major financial institutions around the world to make transactions and investments, and to repay debts overseas. The U.S. Dollar is also the currency in which the world prices and trades vital commodities like gold and oil. And buyers and sellers in every country have to keep large amounts of U.S. Dollars on hand to pay for them.

Historians disagree on exactly when the U.S. Dollar became the reserve currency of the global currency. Some say the change took place right after the First World War in 1919, others say it happened closer to 1929, at the outset of the Great Depression. But all are in agreement that as the Second World War drew toward a conclusion in 1944, the U.S. Dollar had unseated the British Pound as the world’s undisputed reserve currency.

The Pound vs the Dollar

The U.S. Dollar as we know it didn’t actually exist until 1913, under the Federal Reserve Act of 1913, which created the Federal Reserve. The new central bank was created to set monetary policy and stabilize the U.S. currency, which had been issued based on banknotes issued by a number of individual banks.

At that point, the British pound was the world’s reserve currency. Though the U.S. economy was the largest in the world as World War One started in 1914, Britain remained at the center of the world’s trade, and most international transactions took place in British pounds. Like most countries’ currencies at the time, the British Pound was backed by gold.

World War One changed all of that. The fighting was so ferocious, so widespread, and so costly that many countries had to deviate from that gold standard just to pay their armies. Great Britain took the Pound off the gold standard in 1919, and the Pound plummeted—which was catastrophic for international merchants and banks who traded primarily in Pounds. Some scholars maintain that that was when the Dollar became the world’s reserve currency.

Other historians maintain that global trade, especially international debt offerings, were denominated equally in Dollars and Pounds until 1929. They even point to data that shows the British Pound was regaining ground on the Dollar as the currency of choice for international trade up until 1939. Then World War Two began.

World War Two and Bretton Woods

Although Germany didn’t surrender to the Allied nations until 1945, the outcome of World War ll was clear by the middle of 1944. In July of 1944, more than 700 delegates from 44 countries met in Bretton Woods, New Hampshire to negotiate and come to an agreement on the kind of economy that would emerge from the ashes.

The Bretton Woods conference lasted three weeks, and established the U.S. Dollar as the currency par excellence for the world. Attendees agreed upon the Bretton Woods system, which established a number of key global economic points:

•  The U.S. agreed that the Dollar would be backed by gold, which was priced at $35 an ounce when the agreement took effect.

•  The countries who signed the agreement promised that their central banks would establish fixed exchange rates between their own currencies and the U.S. Dollar. If their currency weakened, their central bank would buy up the currency until its value stabilized relative to the Dollar. On the other hand, if the country’s currency grew too strong compared with the Dollar, their central bank would issue more currency until the price fell and the relationship with the Dollar returned to normal.

•  Those countries also promised not to lower their currencies to goose trade. But it allowed them to take steps to increase or decrease the value of their currencies for other reasons, like stabilizing their economy, or to help with post-war rebuilding.

The Dollar Since Bretton Woods

By 1971, the gold owned by the U.S. government had reached a limit at which it could no longer cover the number of dollars in circulation. That’s when President Richard M. Nixon took the step of reducing the U.S. Dollar’s comparative value to gold. This led to the collapse of the Bretton Woods system in 1973.

After the system fell, the countries took a wide range of approaches to how they valued their currency, and what policies their central banks would pursue. But the end of the system led to the creation of the foreign exchange or forex market, now the biggest and most active financial market in the world, with a daily trading volume of $6.6 trillion.

While the U.S. Dollar—now considered a fiat currency—goes up and down in relation to other currencies every day, it is still the world’s reserve currency, with 59% of all non-U.S. bank reserves denominated in dollars, according to statistics from the International Monetary Fund (IMF) .

The Dollar retains its prominence not because of an international agreement, but because of a broad consensus about the size, strength and stability of the U.S. economy relative to other options. Globally, investors still see U.S. Treasury securities as an extremely safe bet, as is evidenced by their low yields.

The Takeaway

Most of the world’s trade happens in U.S. Dollars. But it hasn’t always been that way. And while it’s been preeminent for about a century, the dollar’s status has changed over time.

Interested in investing your dollars? SoFi Invest® online trading offers an active investing solution that allows you to choose your stocks and ETFs, and also an automated investing solution that invests your money for you based on your goals and risk.

See what investing style fits your needs best, with SoFi Invest.

Photo credit: iStock/fizkes


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN0421155

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender