How the U.S. Dollar Became the World's Reserve Currency

How the U.S. Dollar Became the World's Reserve Currency

By Richard Best Updated September 22, 2021  Reviewed By Robert C. Kelly

The first U.S. dollar (USD) is one of the world's strongest currencies. It is the official currency of the United States as well as several other countries. Although it has a deep-rooted history in the United States, the dollar as we know it today was first printed in 1914.1

Printing began a year after the establishment of the Federal Reserve as the nation's central bank with the passing of the Federal Reserve Act.1 That's when the Fed started issuing Federal Reserve notes in $10 denominations featuring Andrew Jackson's portrait.1 Three decades later, the dollar officially became the world’s reserve currency. However, its ascendancy to the throne actually began not long after the ink was dry on that first printing in 1914. Keep reading to learn about how the dollar became the world's reserve currency.

KEY TAKEAWAYS

*The first U.S. dollar was printed in 1914 after the Federal Reserve Bank was created.

*The Allies paid the U.S. for supplies in gold during World War I, propelling the U.S. to become the largest holder of gold.

*Countries pegged their currencies to the dollar after the war, ending the gold standard.

*The International Monetary Fund reported that 59% of all foreign bank reserves are denominated in U.S. dollars.

*Despite its position in the global markets, the U.S. isn't the strongest world currency, ranking 10th on the list.

History of the U.S. Dollar

The first documented use of paper currency in the U.S. dates back to 1690 when colonial notes were issued by the Massachusetts Bay Colony. These notes were used to fund military operations. It wasn't until 1776 that the first $2 bill was introduced—nine days before independence. Nine years later, in 1785, the U.S. officially adopted the dollar sign, using the symbol for the Spanish American peso as a guide.1

In 1863, the government established the Office of the Comptroller of the Currency (OCC) and the National Currency Bureau. These two agencies were charged with handling new banknotes. Centralized printing begins at the Bureau of Engraving and Printing in 1869. Prior to this, money was printed by private companies.1

The U.S. Treasury assumed the official responsibility of issuing the nation's legal tender in 1890—more than a decade before the creation of the Federal Reserve and the dollar as we know it today.1

Martha Washington's image was printed on the 1886 and 1896 series of $1 silver certificates.1

The Gold Standard

The Federal Reserve Act of 1913 created the Federal Reserve Bank to respond to the unreliability and instability of a currency system that was previously based on banknotes issued by individual banks. This was the same time that the U.S. economy became the world’s largest, surpassing that of the United Kingdom. World commerce still centered around the U.K., though, as the majority of transactions took place in British pounds.2

The majority of developed countries pegged their currencies to gold as a way to stabilize currency exchanges. But when World War I broke out in 1914, many countries suspended their use of the gold standard to pay their military expenses with paper money, which devalued their currencies. Britain, though, held to the gold standard to maintain its position as the world’s leading currency and found itself borrowing money for the first time during the third year of the war.3

The United States became the lender of choice for many countries that wanted to buy dollar-denominated U.S. bonds. Britain finally abandoned the gold standard in 1931, which decimated the bank accounts of international merchants who traded in pounds.4 By then, the dollar replaced the pound as the leading international reserve currency.5

The Bretton Woods Agreement

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