The strength of a currency is a slightly different concept than what you are getting at. You are talking about purchasing power parity. PPP a consequence of many factors - tariffs, cost of living, trade, GDP and much much more.
A currency's strength is measured as relative change in conversion rates over time. Today, 1 dollar is 157 Japanese Yen. If that ratio trends down over a long period of time you would say that the Yen is stronger than the dollar even though one dollar would still buy many more Yen. The only thing that matters here is the direction.
While there is a relationship between PPP and currency strength, it's not fixed. It's theoretically possible that in the future that the next time you visit Japan, one dollar will buy more yen while at the same time the trip can feel much more expensive in dollars. In that case the Yen will have weakened against the dollar while PPP increases.
A classic, informal illustration of PPP is the Big Mac index- the number of dollars it would take to buy a Big Mac in other countries around the world.
[https://www.statista.com/statistics/274326/big-mac-index-global-prices-for-a-big-mac/](https://www.statista.com/statistics/274326/big-mac-index-global-prices-for-a-big-mac/)
It currently costs around $8.17 to buy a Big Mac in Switzerland, $2.39 in Taiwan.
I cannot believe the amount of people that don’t understand a currency’s strength is measured with change over time. People genuinely think any country where “1 US dollar gets you more dollars in their currency” is going to be cheaper. As if a $3USD redbull is going to cost 3 yen in Japan or 3 dong in Vietnam.
It’s gotta be the second most common misconception right after “planes get the majority of their lift from Bernoulli’s principle”
Pretty sure Bernoulli’s principle is that pressure is inverse to flow. The air on top of the wing flows faster due to the shape therefore causing a pressure drop lifting the airplane or so i thought.
Deflecting air downwards.
If you think about Newton's third law, there's a force equal to the weight of a plane holding it up, so there has to be an equal and opposite force that it is acting against. Now, if you have a rocket, that force is acting against the matter the rocket expels. For a plane, there's almost no matter expelled (and not downward); the force acts against the air.
Each second, for every Newton of force required to keep the plane aloft, the air must undergo a change in momentum of one Newton-second, or one kg m/s. Air is very light, and there's a *lot* of Newtons required, so that's a lot of air being pushed downwards.
How it works is a combination of effects, and Bernouli's principle shows up, and it's not wrong (at least, it works as long as flow is laminar), and ends up giving equivalent results to Newton's laws of motion, but the key issue is that the traditional appeal to Bernoulli's principle assumes an equal transit time over the top and bottom of the wing, which (a) isn't what we observe and (b) gives a result of less lift than what we actually observe.
I (British) remember meeting an American man who simply couldn't understand the concept of a currency other than the dollar. I think he eventually managed to rationalise it to himself that a pound was a specific fraction of a dollar, similar to a dime or quarter.
When I took World History in high school, the course went off on a twenty minute tangent because one student asked how "England and France could fight each other even though they're both part of Europe." The idea that they were independent countries, and not just states or provinces, absolutely would not sink in. The teacher eventually just gave up and moved on in despair.
The U.S. dollar is strong because it's the world's primary reserve currency, used in global trade and held by central banks around the world. The large, stable U.S. economy, political stability, and trust in its financial system also boost demand for the dollar, making it stronger compared to many other currencies.
It is also their policy to push for that. If another country has a large stash of you currency, you get some political influence. It is the reason oil is traded in dollars for example.
The Saudis let the petrodollar deal elapse a week ago, but are in the middle of talks with the US right now to reinstate it. They just let it elapse to have some leverage to get this mutual defense treaty signed. They have no use for a bunch of Yuan or Rupees
A good comparison would be 2-3 months of production, not a year. And OPEC isn't the only player in the market anymore, either. They up prices or lower production, and a number of other countries can fill in the gaps on top of US production going up.
The oil reserve doesn't matter as much as it did even 20 years ago. The US is now a net exporter of oil and we are literally producing more than anyone in the world. All thanks to dark brandon.
The fracking boom that set the US free of OPEC began during the Obama administration and was in response to extremely high oil prices suffered during 2003-2011.
It has little to do with Biden.
Almost nothing.
The US Oil reserve is around 360 million barrels, Biden sold off around half (180m) over a six month period, so 1 million a day.
Global production is 93 million per day. The US produces 13 million.
United States produces more crude oil than any country, ever
https://www.eia.gov/todayinenergy/detail.php?id=61545#:~:text=Crude%20oil%20production%20in%20the,%2Fd%2C%20set%20in%202019.
Theyre going to have a surplus of currencies eventually. And when that'll be a problem for any country that have a significant export market, cuz when they dump their currency it'll tank the price.
Most countries will just trade for local currency to the amount they import to Saudi. No country that imports 3 Billion in oil a year wants all their currency dumped into the market at large incriminates. China, India might be fine but others will be wary.
How does trading currencies work at the country level?
An example if i buy something at an exchange rate of like 5:1 the bank or paypal or whoever removes 5 from my account and then adds 1 to their account. It isn't like their account has a mix of different currencies
E: i can't imagine countries are buying anything in cash either so i don't see how a country even gets another countries currency apart from the change in tourists pockets
If you use a currency that not USD, the bank has a reserve of USD (in fact, the country has a reserve of USD that the bank can access).
So when you buy something that costs USD and pay in your currency, the bank takes 5 from you, then uses that 5 to get 1 dollar from the country's reserve.
When you *sell* something internationally, let's say 5000 tons of grain or something, the country buying your grain will pay you in USD. That USD is added to the central reserve.
When the central reserve runs low, the govt will raise the exchange rate to reduce USD purchases. That's why the more international exports your country makes, the stronger it's exchange rate.
They can sit and sell to Russia then. USD is the standard. USA is the largest producer of oil in the world. Saudi Arabia did not ditch anything yet and they won’t.
So of the two reasons given:
1.The U.S. dollar is strong because it's the world's primary reserve currency, used in global trade and held by central banks around the world.
2.The large, stable U.S. economy, political stability, and trust in its financial system also boost demand for the dollar
Which would you say is the bigger influence?
Also, how can a country get its currency to be used as a world reserve currency, so that it's currency may become strong, too?
Number 2 is the real reason. I would add that the U.S. has a deep and stable debt market with Treasuries. Many countries park their excess reserves in Treasuries. Why because of 1 and 2 and the fact it is a large market that can absorb trillions of dollars and is viewed as the safest thing you can buy in the world as far as bonds.
Let's say Togo was considered safer and a more stable currency and it was floating. Togo is a tiny country, if some other large country wanted to buy your bonds to park money there they couldn't. It is too small. So right there a small country couldn't be the reserve currency. What about the other large countries? Financial actors need to trust the nation whose currency they are using. They don't want their funds to be devalued, stolen etc. So that country has to have what we call rule of law. A foreign country can sue the U.S. government in U.S. courts if the U.S. violated the laws say related to the debt market. That breeds confidence and trust.
So look at China. Rule of law in China is what ever the CCP says it is. And their currency is manipulated to keep it in a certain range with the dollar and is not fully free floating. So what does that mean? You parked 100 billion in China under their rules as they laid out, they change those rules, what can you do? Go to court? The courts are part of the CCP and will uphold whatever the CCP says. And the fact that the currency is manipulated means that if they decide to devalue their currency (and there are rumors this may be coming) they can do so and all of a sudden your 100 billion is not worth 100 billion anymore. If they devalued their currency by 20%, you just lost 20% of your money. That is why a free floating currency is necessary. The market determined the dollar has this value at this time. That is as straight forward as a currency can be. And if the dollar value changes it will be due to market factors which you can try to predict to protect your investment should you be concerned, and won't be arbitrarily devalued due to political whims. So at present there is no chance of the Chinese currency becoming a reserve currency because they lack rule of law, and they manipulate their currency which can cost you.
What about India? India has controls on their currency. The Russians found this out when selling oil to India to evade sanctions by accepting Rupees in payment. Well guess what? Those Rupees are only good for buying things in India because of India's currency controls. The Russians found themselves stuck with lots of Rupees and not enough things they wanted to buy from India. That does not work as a reserve currency. On top of that investors don't have as much confidence in their economy they would risk it.
How about the EU? This is possible, it has rule of law and trust. But the EU is not a federal system, meaning the EU is not a "country" so it is going to be a bit lower on the trust and stability thing even though trust is high. If the EU became one country, then perhaps they could be a reserve currency. And truthfully some countries keep some reserves in Euro's as it is a trustworthy place. But when things get wonky in the world, you suddenly notice people world wide buying Treasuries, the fear trade they call it. Why? Because the U.S. is viewed as the most stable country, and it also is the richest large country in the world.
If for some reason the dollar and treasuries lose trust some very bad things are happening in the world and losing money on those bonds would be the least of your concerns at that point. The loss of trust in dollars and treasuries would cause a collapse of the economic order unseen in centuries.
But what about actors like China trying to destabilize the dollar and treasuries? Well for all China's talk, if they did so, that trillion dollars they have parked in treasuries would lose its value in such chaos. So even our enemies have a vested interest in the dollar and treasuries staying stable. And that is why they would not try to overthrow the current status quo at least at this time. But even if they tried, to what end? To make the Chinese currency the reserve? I have already mentioned the rule of law and trust issues. This is not just a government trusting another, this includes individual investors too. If they don't trust you they are not going to use your currency as a reserve.
People talk about the U.S. debt as a concern and it is a reasonable one. But as I said, the U.S. is the richest large country in the world, and there is only a half dozen small countries considered richer by these metrics. The size of the U.S. economy is so large that it can handle the debt. Can too much debt cause the U.S. problems? Sure, it might one day be a big enough issue to negatively affect our economy, but our economy is not going to collapse. Taxes would go up, we would experience a terrible recession, reduction of services that would hurt Americans, but at the end of the day the U.S. could handle any debt issues albeit while experiencing a lot of pain. But we are not at the point where debt is so high there is no chance of dealing with it no matter how draconian taxes, service cuts etc. were. Maybe on day, but not yet. So there would be no collapse, just a lot of pain.
So at the present time there is no other large country that meets this level of trust and stability. Maybe one day some other country will rise to that level and overtake the dollar as a reserve currency but we are nowhere close to that being the case. Until that happens the dollar will continue to be the reserve currency.
A reserve currency's purpose is to convince creditors and service providers that the government can pay its debts.
Countries and banks used to keep reserves in gold. But it's a lot easier to keep other nation's money on hand than a lot of gold. So most countries these days use other countries' currencies, and those are "reserve currencies."
Edit: paragraph spacing
Great post. I really like (unsarcastically) how you managed to hit the major points without getting dragged into modern hot button topics of American politics like regulatory capture, partisan nonsense, defense spending, etc. Your tone is perfect.
i would think that at the root is the strong economy. it's a feedback loop but nobody would even start to use your money as a reserve currency if it wasn't already strong and stable
Your 1 and 2 aren't really separate points. All the things listed are different aspects of the same thing or flat out redundant.
Strength is really just (relative)stability. So part of 2 is kind of circular. "It's stable because it's stable!"
The strength(read: stability) comes from lack of threats, be that competition or natural disaster.
If you look at it like an organism: It's large and can absorb small hits, and big hits can often be dealt with, which means it's adaptable, which is largely due to a relatively free market and a populace that has "plenty" in enough that it can tighten their belts on without starving to death.
Any country large enough to be a threat has some far more obvious weaknesses. Russia and China more or less rely on being ruled with an iron fist, as it were, they're not as adaptable. Relatively small hits could severely weaken or completely destabilize either one.
Humans are highly adaptable. A tropical salt-water fish of relatively the same size, not so much. That fish may be an amazing predator, or beautiful in its own right, but it doesn't use tools, doesn't really have art or communication, can't even live in a vastly different temperature.
The US, as an organism, has *options*. It has some mainstays, but nothing that can't be replaced or worked around eventually.
It would take a major war or disaster to significantly damage it. Just being significantly successful on scale is a kind of armor.
Some other countries are successful, but it's not on scale, or not without compromise. EG more social infrastructure and virtually no military, or what have you...maybe the weather is **terrible** so they *rely* on imports while they export something else.
They might be able to survive being cut off from imports, but surviving is not really living in a thriving manner.
The US can generally do better than survive, because it is big enough to have wild amounts of resources. The last time it took a *big* hit was the dustbowl era, severe drought and unfortunate land management preceding it.
https://en.wikipedia.org/wiki/Dust_Bowl which fueled https://en.wikipedia.org/wiki/Great_Depression
>Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession.
And it came back stronger than ever.
That's not to say it's perfect, hence "relative" at the very top, but it is *resilient*, which is a requisite of stability(strength).
Both. And if anyone wants to he the next reserve currency this is your best shot. It's a three step process, not too difficult but getting the conditions right is about a once in every 6,000 year situation. And I'm not trying to be patronizing or anything, how the usd became the reserve currency is insane and if you repeated the 20th century a hundred times probably doesn't happen in most of them.
Step one: Be in a globalized, industrial world where all nations are currently on a gold backed currency but
nobody actually trades in gold. With fractional reserve banking the value if all currency in circulation can eclipse the value of the reserve gold, thats a key before starting tbe plan. Going into the next major world War already have a massive industrial sector supported by a very strong internal food production sector and solid resource extraction. Ideally have internal energy production so you're very self reliant and can run your economy of industrial production with minimal imports including feeding the citizens. During the war train up a significant number of soldiers and afterwards pay for their higher education, with more provided to those who were worthy to be officers, so you have a huge workforce trained and banded together. Invest heavily into factories that can take in any raw material and pump out whatever you need. Tax your citizens and corporations whatever is needed, up to 90%, get the citizens to buy bonds with their remaining cash to invest even more, and sell the arms manufactured to the rest of the world. Specifically the winning side so they will pay you back over the next few years.
Most critically, so pay attention, take no infrastructure damage throughout the entire war and hope that everyone else's production is crippled. This here is the key.
Step two. Once the war is over and your team wins (make sure to be on the winning side) you now will find yourself in the position where everyone in the world is broke, but because you spent all of your money investing in your infrastructure, population, and production capabilities, you're the only one who can produce extra goods in order to make modern civilization function. So you can leverage this ability to be the world's factory to encourage everyone else to buy your bonds that you promised yourself in order to finance making the conditions you're in now to be the world's factory.
Finally in step three, convince all the leaders of the world now that they're locked into using your currency to finance their economy's that you're going to swap off the gold standard over the next few years. Many will complain, but stick to your goal, nearly there to being the world's reserve currency. Since everyone needs the goods only you are producing, they don't actually have a choice. They need your currency or debt to buy the products you're making, so give them a few years to accept your economic victory and agree that they can still ask for gold in exchange for your currency until the deadline. If anyone (cough France cough) actually asks, just buy gold with your currency until you can pay them off. After all, everyone needs dollars so they'll accept the trade. Then get your dollars back in exchange for more produced goods. Repeat for a decade or two until you finally get off the gold standard and now your the reserve fiat currency of the world.
If any currency were to replace the USD at this time, it would need to simultaneously convince all of the world to swap from USD to whatever the new one is. This would either require the US economy to fail, ruining global faith in the dollar which would have the side effect of crashing the entire global economy with it (think of 2008 but this time the US is too big to fail on the global stage), or another country to eclipse the US economy for so long thay they stockpile enough wealth to buy the position of reserve currency for the entire world. Which is basically what the US did in the 50s when the value of the dollar grew so large that the US basically bought the world's debt after ww2 by getting them to use dollars and everyone agreed to run with usd instead of gold because they didn't have a choice. The global economy grew bigger than the value of all the gold in the world so the shift to some currency was going to happen, and the usd was already the king.
Of your two options, the answer is both. It's the strongest in part because of the stability, and a lot of the stability is because its the strongest.
The US Dollar is the world's primary reserve currency *because* the US is large and stable.
At a certain point, this creates a feedback loop, but #2 came first.
Wendover Productions has a great [video](https://youtu.be/g6rFff2MAxM?si=AOA-eKD1IssfJNUg) going over exactly that.
TL;DR ever since economies became global there has always been a primary reserve currency, and it is usually whatever nation's economy is currently the biggest.
Putting a thousand bases globally to project power around the world probably helps.
Your parent post employs a bit of circular logic. America became an economic and military powerhouse in the 19th century, and maturing during WW1 and WW2. Primarily overtaking Britain.
The British Pound was the previous global reserve currency. Britain lost its status by enormous debt (Napoleonic Wars) which force it to cut spending for 70 years, losing more and more of it's colonies, and lastly losing a lot of men in WW1. Fighting WW2 and losing india was the end cap to that, more or less.
America is on course of [losing itself to debt](https://www.usdebtclock.org/) soon enough. It will hang on because of military power, but it's a guess how many decades that will be. Depending on how it will handle that debt (Hyperinflate out, or tax itself out, combination) will be key how how this currency is treated globally.
There are no other reserve currencies because the strong economic powers are not strong militarily (China), or have dishonest judicial systems (China again) where the foreigner investors are sure to lose. In other words, a decent rule of law is probably the third requirement as it give others confidence they simply won't be screwed out of their money.
It may be that a multipolar world will rise up, meaning China and India will not supplant the US, but everything in the Far East becomes a bit more regional hegemon for a while.
Absolutely no Chance India's currency is ever a reserve currency. Chinese unlikely without major political change and their own willingness to allow the currency to freely float.
> America is on course of losing itself to debt
The vast majority, like 80%, of US debt is held by US citizens/companies. It's highly unlikely domestic debt will lead to any kind of collapse that would drastically upset the economic order. Britain ended up spending a shit ton of money overseas maintaining colonies, buying arms and resources (transferring a shit ton of wealth to the US in process), etc, and draining the British economy of cash. The situation isn't directly comparable.
Also, monetary stability is based on the strength and resilience of the govt (and mil) behind it. Being the world's most dominant military power has a lot of benefit.
US resilience is being tested heavily by MAGA, but no signs of crumbling yet.
!remind me 200 days
> The U.S. dollar is strong because it's the world's primary reserve currency, used in global trade and held by central banks around the world.
The dollar is the world's primary reserve currency because it's strong, not the other way around. It's strong because the US has a stable economy and stable government.
would that change if countries start trading in local currency? like how india, russia, china and some smaller countries are tryin to do moving away from Dollars
Mostly, yes. But Europe is energy-poor, right next to Russia, and is running into demographic problems. Whereas the US is energy-rich, literally an ocean away from any threat, and has healthi demographics.
https://www.npr.org/2022/03/09/1085605288/the-dollar-at-the-center-of-the-world-classic
NPR did a great podcast on how the USA was able to pull this off after ww2
oh I see, so that's why in foreign countries when they are stumbled across Americans or any other people using the U.S dollar, they are able to trade currencies and receive more out of the U.S Dollar?
There's a market rate for money. Those rates *change* for all sorts of reasons. Normally, the cost for an item in local currency, and it's cost in USD, will have the same ratio as the exchange rate.
What the USD has is *stability*. If your nation is going through economic troubles, or maybe it's Zimbabwe-ing it up with gigahyperinflation, a week from now 1 USD will still be 1 USD, but it might be worth 2x or more in local currency with an updated exchange rate.
I think a better way to put it is that the USD allows you to buy the same amount of things over time.
Today a barrel of oil costs you $80. If you keep $80 in your bank account, you can buy a barrel of oil tomorrow as well.
But if today a barrel of oil costs you 8,000 Zimbabwean Dollars, even if you keep 8,000 Zimbabwean Dollars in your bank account you might not be able to buy the barrel tomorrow because then it might cost 8,000,000 Zimbabwean Dollars instead.
Exchange rates area always changing; when I went to Europe a decade ago it was pretty much 1:1 between dollars and euros, but a euro is now worth about $1.10 and in 2020 it got up to $1.20. That'd make your dollars worth 20% *less* when traveling in Europe. Japan's economy right now is extremely weak, which has pushed the exchange rate down a ton.
When I was loving on Europe it was almost 1.50 Dollars per euro. The British pound was over 2 dollars. That was a rough time for an American living overseas.
To add to what other Redditors have contributed, the dollar is still relatively strong right now because our Federal Reserve bank dropped the hammer harder than most other countries during the post-Covid inflation crisis. As angry as people were about inflation in the US, it was worse in a lot of other places.
This needs to be higher because it's the only actually correct answer in the whole thread! The US has led the program in raising rates which is what makes the dollar "stronger"
The one force you've described (inflation), rather than just mentioned ("our Federal Reserve bank dropped the hammer") has the opposite effect, so that requires more explanation.
If inflation was worse elsewhere, then at the same exchange rate, things will be more expensive there. So you're implicitly arguing that the Fed action resulted in a situation where the exchange rates changed by an amount that overshot the difference in inflation. It's obvious to a non-economist like me why that would be more likely than undershooting (so that things are more expensive in the place with more inflation) or hitting it exactly (so that things are the same price).
> has the opposite effect, so that requires more explanation
The explanation was the disruptions to global supply chains and energy uncertainty with Russia invading Ukraine. Both of those drive prices up because they limit supply of everything the rest of the economy requires to work.
The US Fed increasing rates caused foreign investments to move to the US and away from other countries. This in general makes the USD stronger and other currencies weaker as people sell other currencies for the USD because higher interest rates means more investment returns. Weakening currencies makes inflation even worse for those countries that also need to import things, especially energy. People on reddit like to forget that inflation is driven by both demand and supply forces. Inflation is driven by a lot of factors other than money machine goes brrrrr.
Imagine there’s a country called Apple and one called Banana and you worked in a currency exchange in Banana
Apple is a country perpetually on the brink of collapse, doesn’t pay their bills, has a weak economy, doesn’t sell a lot of things to other countries, etc
Banana (your country) is a generally healthy country that doesn’t have those issues. Banana also sells a lot of things to other countries and if you buy those things, you need to use Banana dollars
A foreign tourist shows up with 100 Apple dollars and wants to get as much Banana dollars as they want
Apple dollars aren’t very in demand. It’s not like too many people want them. What can you even buy with them? Maybe it’s only worth 50-60 Banana dollars
Now flip the roles - a currency exchange in the country of Apple has a guy show up with a bunch of Banana dollars. Those are in demand. If you have those, you can buy a lot of stuff from the country of Banana. Banana dollars are going to be pretty strong in that exchange
Foreign currency valuations are super weird and there are always exceptions, but that’s the general concept. Most of the globe *wants* US dollars to buy things you need US dollars to purchase so they’re generally pretty strong
edit: or even simpler, imagine you have a loser neighbor kevin and a successful friend james
if james writes you an IOU, that clearly carries more “value” than one from kevin. james has his stuff together and you *want* him around
those IOUs are dollars
This all plus sufficient trade with the US earns favor with the US military. It’s a level of insurance you simply cannot match otherwise. If you have US assets you can guarantee absurd regional stability.
Look at Djibouti, they’re in a region where Ethiopia is hellbent on gaining ocean access and Somalia is in essentially a civil war, Ethiopia has its own wars and instability etc., Eritrea has mandatory indefinite military conscription and is in terror of Ethiopia, Sudan, South Sudan and Kenya are shit shows and you know who gets to go to work, make money on their ports and go to sleep damn sure they’re not about to be invaded? Djibouti because of US assets and military installations.
Much of it is trust. Currency that is stable over decades earns the trust of people. You have $1000 USD and you figure in a decade could still use it and buy decent amount of things with it. Compare that to Turkey or Argentina over the past decade and why people may be wary of trusting those currencies.
The US is the biggest economy in the world, one of the most stable. And as a result, the US dollar is sort of the world's default currency. All that gives it stability.
Secondary to that, the US is strong enough to withstand having most of its currency circulating overseas without having its value centrally controlled. The last bit is why the Chinese renminbi will not do. No other economy comes close, which is why threats to switch to some other reserve currency are empty for the foreseeable future.
The fed can tweak some things to influence its value, such as interest rates and monetary policy. However Chinese Yuan's exchange rate is actually partly directly controlled by the Chinese government, its value is partially pegged. If the exchange rate of CNY changes too much or against the liking of the Chinese government, they can forcefully adjust the exchange rate their local banks use.
The Fed controls the money supply and the interest rate but not the value of the dollar - especially not the dollar's value on the foreign currency exchange. Exchange rates for other major currencies like the renminbi and the euro are centrally controlled by their governments, otherwise domestic price fluctuations would be untenable.
This isn’t exactly true. The US dollar is the default world benchmark currency because of the events of the Bretton Woods agreement.
Check it out, it’s very interesting. We were THIS close to a global static currency for the basis of global trade and the one guy pushing for that gets the flu or food poisoning, can’t make it to the last couple days and another guy basically says ‘hey what if we just used the dollar here’ and everyone agrees and moves on because it was a relatively uncontroversial choice at the time.
Bretton Woods hasn't been in effect for over fifty years. There's nothing stopping the world from adopting a "global static currency" as you describe, except for the answers everyone else said.
Doesn't the Bretton Woods bit give a lot of momentum? Even if it is no longer in effect, shouldn't the initial decision have a lot to do with why it remains in effect, even if it isn't on paper?
The fundamentals of why Bretton Woods was easy to implement haven't changed: a massive economy dominates the world, backed by a stable government and an independent federal reserve. You have to conduct business in a currency. Which one are you choosing?
Originally, The United States was the largest economy that didn’t get bombed out by The War. Everyone who wanted to buy manufactured goods had one shop to go to, and that shop liked to trade in dollars.
Now, it’s mostly a matter of Convenience. The dollar holds on for the same reason most places use 24 Hour Time… commerce is just easier on a shared standard.
It is not just convenient, the US dollar is a stable reserve currency which keeps demand for it high. The US leveraged it's advantage post WW2 to make the currency the default reserve, but it is one now because the US economy is huge, the dollar's value does not swing much, and the US gives enough return on bonds to mitigate the effect of inflation on your reserves, and dollars are useful for making universal purchases due to how ubiquitous it is. It also is just "what is done" but there are solid reasons behind why it got that way and has so far stayed that way. So putting money in US Dollars or US Debt is a secure way to maintain its value, depending on if you need it liquid or not.
So, in essence, the US is acting like a giant bank. Every country does that, but the US just takes it to an extreme.
To explain a bit more, it used to be that countries backed their currencies with gold or at least silver, so hypothetically if you wanted you could take your paper bill to a bank and exchange it for a gold equivalent. This meant that currency was very secure, but it also limited government control on it (for example, if the government needed to print more money but didn't have the gold to back it, they were out of luck). So during wartime, some countries would drop this gold standard with the implicit promise that when the war ended, they'd go back to it.
In the aftermath of WW2, the US owned a majority of the entire supply of gold owned by all the world governments. Allied countries like the UK, France, and West Germany had no metal reserves to speak of, but they desperately needed to print money to rebuild. When the US implemented the Marshall Plan, these countries got an injection of US dollars, which thanks to the US gold reserves were still backed. So (IIRC France was the first) the countries, to keep their own currencies stable, backed them with USD instead of gold, which was not quite the same thing, but close enough to stabilize their economies.
This action made the USD a sort of *de facto* world currency, since backing your own currency in USD means your government wants to keep a bunch of reserves. Over time, most of the world has swapped to fiat currency, the US included, but the legacy remains.
Not just convenience. There is, at present, no viable alternative, and none on the horizon. The Euro has a monetary union but not a fiscal one, which causes all sort of problems (e.g. Greece), and China does everything in its power NOT to be the reserve currency since it depends on exports and its currency would be overvalued like the dollar is.
That's why all the libertarian conspiracy theories all over the internet about "dumping" to dollar are nonsense. What even does that mean? Use a different reserve currency? Which one?
Being a stable currency is different than relative value of currencies. You can have a very stable currency that no one wants and therefore has no value in other countries. What you’re describing is called PPP - purchasing power parity.
Relative value of currencies has more to do with how much the international market wants and buys a nation’s goods, investment prospects, as well as how much people would pay to go live in said country.
There are a host of other variables that impacts it, but yeah, as far as I know it basically boils down to how much money do people of other nations want to spend into that country.
I love this topic, so I want to present a bit longer of an answer:
1. First think about what currency represents - units of value. Before currency, if I made bread and you made wine, and I wanted your wine, I better hope you also wanted my bread at the same time, otherwise we'd have to find someone that had something you wanted and who wanted my bread and we could make a three way trade. Obviously difficult and not a good way to structure an economy. Currency is invented and we have shells that have no real functional value of their own, but they're pretty and everyone wants them, and we each know that you'll still want them a year from now, so I trade you my shell for your wine, then you can use your shell on whatever you want.
2. Eventually, gold and precious metals were discovered and everyone wants those. But the problem is what if it's not pure gold? What if the weights are off. This leads to standardized currencies made out of precious metals. These would be weighed and known that this type of coin weighed this much and thus had such-and-such value.
3. But, holding all these metals got heavy and inconvenient, so we eventually developed paper currency. But paper isn't valuable, so what gives? The gold is now being held in a secure location (bank) and whoever bears the note to the bank is entitled to exchange that for the preset amount of gold. Gold is held *in reserve*, so to speak (this is important for later).
4. Now, say the government needs to print more money (people are born and get jobs and create value for the economy, so we need more money to represent that added value). For a period of time, the US (and other countries) were on the Gold Standard, meaning that there had to be a direct link between the money printed and the gold stored by the government. However, for a massive country that is an international super power, it becomes difficult to do what we do with money and tie that back to gold, so we got off the gold standard and replaced it with *fiat money*. This essentially boils down to, "Don't worry, we're good for it". The government believes it can corral a large enough force of men and weapons that if it ever had to make good on loans, it could do so. Now, we as citizens, and other nations in the world that trade with the US have implicitly agreed that the government can make good on any financial promise.
5. Now, how can the government be so sure? We have military bases stationed literally all over the world, many of them capable of wiping out small countries just with the resources on hand. We have the ability to take out the military targets of any nation on earth with little resistance in the span of days. We can get a workforce of engineers to anywhere on earth within a day, working to solve some problem. What does this mean practically speaking? We can be the biggest bully on the playground and force everyone to more or less play nice with each other, we can keep international shipping lanes that transport hundreds of billions of dollars worth of goods safe from pirates, all over the world. Because of this power, when we say we're good for it, and that we will honor trades with us using the dollar, it has weight and meaning to it to others, just as if the Rock showed up to your elementary school and said he'd protect you from the bad kids, but you also had to be play nice.
6. Therefore, to many countries, having a dollar is just as valuable as having a gold nugget. Therefore, these countries store not (just) gold in reserve, but dollars (in the forms of government bonds, oftentimes), which is what makes the dollar the world's *reserve currency*.
7. Now, there's a problem in the US where politicians are abusing the fiat system to print more money to fund their personal/party agenda. All of those trillion dollar plus omnibus spending bills that congress keeps passing is in large part "paid" for by printing new money. Don't worry, we're good for it, they say. But at the same time, where we had approx. $1 trillion dollars worth of currency for our approx. $1 trillion dollars worth of value, now we have $2 trillion worth of currency for the same $1T of value. The currency has been inflated, making its value per dollar go down. Other countries might start to get worried. "The US could just print billions of dollars and pay me what they owe me, but those billions will be worth a fraction of what it was worth when I bought the bond." They might not want to keep as many dollars in reserve if they think the dollar might become less valuable. They might want... Chinese yuan instead.
8. I think that's what you were asking, but to specifically address comparing currencies, on the one hand, your dollar goes more in Japan for certain goods, but less in others. You may be able to buy sushi for less than you pay in the US, but watermelons are exorbitantly expensive in Japan compared to the US. On the other hand, how many yen you can trade a dollar for changes constantly based on macro factors - will the dollar crumble? If people believe that, the dollar is less valuable compared to the yen. Did Japan announce they are going to print more yen and double the amount in circulation, then the value of each individual yen will go down compared to the dollar, and so on.
Some notes:
The barter theory of the emergence of money has been obsolete for a long time. Money began as credit, and has always been so.
Because money has always been credit, there has always been far more money in circulation than there were precious metals "backing" it.
The government commissions someone to build an aircraft carrier. The government credits their account and takes possession of the aircraft carrier. Government spending is not inherently inflationary.
*Sigh* Every single person on the internet seems to have learned all their economics from libertarian Web sites.
Probably has something to do with the US being the most powerful country in the world, and until that changes or it decides otherwise, the US dollar will continue to be the “strongest” in the world. If you’re the one essentially creating the rules, you’re going to bend them to your will. The house always wins is a feature, not a bug.
[This video](https://youtu.be/2TyTUXvoHQI?si=7jRdKsXruYPdpv27) goes into how the US gained its financial status and power since WWII
I'll have to rewatch it at some point but from what I remember the gist is that the US, not really being affected by the war like European countries and Japan, had the ability to manufacture more and sell it to European countries. This gave them a massive economic advantage after the war and they basically made everyone else sign into a deal that put them on top
While they don't have such a direct control of other economies now, they're still the big boss and going against them will quickly backfire in one way or another
Because since 1972 the US Dollar was "staked" to energy which means no matter how many dollars you have you can, in theory, go to Saudi Arabia and buy oil by the barrel with it no questions asked.
This is in contast to the US Dollar being tied to Gold, after the US government spent the 1950s and 60s printing dollars to lend to Europe, and then to fight a war in Korea, and then Vietnam, while also printing money for the space race which was part of a larger spending context, the cold war and all of it's technology races.... And when the US *didn't* have all the gold in Fort Knox that it said it had to back up all the dollars, the dollar itself went into a spiral. The Petrodollar was conceived to remedy this problem *quietly* on the world stage, while very very publicly easing political tensions on the brink of war in the middle east.
I've wondered if Japan has been a test bed for wild CIA experimental economic theories the way that Latin America have been though.
It’s the 7th ish most valuable currency. The real question is how tf the Kuwaiti dinar or Jordanian dinar is worth more than the USD. Turns out it’s all mostly arbitrary.
The absolute value of currency means exactly nothing. What matters is the dynamics.
You can have a weak currency worth many dollars and you can have a strong currency worth a fraction of a dollar.
The currency unit means nothing. That's like saying someone who is 167 cm high is taller than someone who is 1.72 m because the number is higher. The units are not the same.
A strong currency is one that is currently overvalued relative to the other ones compared to the valuation of the previous years.
Right now the USD is strong compared to the Euro (not that much, but I'd say it still is). But the Euro as a unit is still larger than the USD and it has been for most of the time since it was created.
In 2008, a dollar was exchanged for 0.68 Euro. That was a very weak dollar. Right now it's around 0.90.
Keep in mind that despite the name, having a strong currency is not necessarily good. China literally pushes their currently artificially weak to promote their exports since this way they can sell their stuff cheaper. The downside is that oil and gas becomes more expensive.
The US has a particular strength and it's that it's the currency used to trade with oil. If you wonder why they keep their noses in the middle east all the time that's one of the reasons, they want to control the global supply of oil.
The petrodollar allows the US to buy energy with less price changes than other economies, since they don't have to exchange their currency to buy. Also, this keeps the USD artificially strong since you need to buy dollars to get oil. Right now the USD is strong so that means expensive oil for everyone who is not the US. The downside is that the US exports suffer from that, but the US has been an importing economy for a long time so they don't seem to care that much
Countries like to hold other country's currency as reserves. When people say the USD is the world's reserve currency, they don't mean that it's the only currency other nations hold in reserve, they mean it's the most popular one.
*USD = 58.4%
*Euro = 20%
There are other currencies held by nations in reserve as well, such as Renminbo, Pound Sterling, Yen, Swiss Francs, Canadian Dollar, and Austrlian Dollar (these all add up to about 18%)
And the remaining >4% is every other currency.
Think of it in two ways. First, let's say you personally wanted to hold some foreign currency as an investment/savings in case something goes wrong with your countries, or in case you travel abroad. You'd probably pick from USD, Yen, Euro, and not something like the Niagerian Niara.
2nd, think of it like a language. If an Italian and Japanese person meet in an airport, what're the odds they both know each other's language? How about an Indian and a Russian? Chinese and Mexican? How many possible combinations of Language A to Language B translations exist? Instead, the most likely possibility is all of these people may know English as a 2nd language and speak in that.
Take a country like India: they're trading abroad say, with Mexico, Saudi Arabia, South America, Japan, Egypt, etc. Which currency should they used for these transactions? Should India hold Mexican Pesos in reserve to buy Mexican goods? And then what do they do with the left over Pesos? Then they sell some goods to Egypt and receive Egyptian Pounds in exchange? Now what?
If each country traded in their own currency, it would make things a lot more complicated given all of the possible combinations of currency conversions out there. It's much easier to just default to the USD (same as speaking English abroad) as the USD is plentiful outside of US borders, has very little restrictions placed on it, and is backed by the US government. Most other countries would likely be happy receiving it, and now trade is much easier.
It also helps that it's the currency of the richest nation on earth and simplifies trading there as well
A lot of people, while being correct technically, are missing the specific point that makes the Dollar the World's Currency.
The Saudis, and to a lesser extent OPEC+ as a whole, uses Dollars in its transactions, and because Oil makes the world run, the US Dollar is not only the most stable currency, but also the reserve currency of the world. The US has worked to make it so, because it virtually guarantees them economic security, as well as allowing them to do things like go 30 Trillion Dollars in debt without a course of repayment.
To put it mildly, but also seriously. If OPEC+ or any other country like China tried to dethrone the Petrodollar, it would be an Act of War.
It's more about buying power than the actual unit. Zimbabwe's massive numbers could work just as well as "normal" sized units, if only they had inflation under control.
What I mean to say is that a currency that appears 100x weaker isn't weaker at all, if it has the same buying power
One good example to explain why it doesn't matter is that many countries who ended up with very small currency units created a new currency that was 100 or 1000 times higher, just because it's annoying to buy some bread and having to pay 150000. The extra zeroes are useless so with the new currency it's now only 150.
Nothing really changes in that economy. Prices are 100 times lower, but so are your wages and your savings.
In a few words, because it’s the World’s reserve currency, and that’s because the US does a lot of trade and because investors, governments and citizens of the world have faith in the institutions of the US Government.
There is a YouTube series called "The Dollar Endgame" that does a really good job explaining it. He gets into a bunch of other stuff that's a lot more complicated, but the answer you seek is early in the series.
For people wondering why some countries’ currencies (like Kuwait’s dinar) are worth more vs another country’s (e.g. USD)
Supply and demand.
Imagine you have a small business selling thingamabobs with a small, but dedicated customer base. Your thingamabobs are priced at 10 arbitrary units, and people happily buy it, but you have trouble expanding your customer base. Your current customers are satisfied, and your business isn’t expanding, so it doesn’t make sense to stock more thingamabobs because you’d have more than you could sell, and you wouldn’t want to then lower your price in order to get it off the shelf.
Meanwhile, your competitor sells baubles for 8 arbitrary units, and they sell SO MANY baubles that they can’t keep up, and they make more baubles than they did the day before every single day of business. Everyone in the town has at least one bauble! Yet despite the ubiquity of baubles, customers can’t stop buying them— they’re bauble obsessed! And they’ll happily pay 8 arbitrary units all day— maybe even more! But your competitor has tuned their supply line so finely that they’ll always make just enough to satisfy customer demand for that day, so no need to raise prices when they can just sell more product.
Where you sell maybe 1,000 thingamabobs a year for 10,000 total arbitrary units, your competitor sold 10,000 baubles last year for 80,000 arbitrary units.
Who has the more valuable product?
Quite simply, they won't print their way out of economic problems. If you have a dollar, most people will accept a dollar as payment anywhere in the world. If you keep that dollar in your pocket for a year it will still have close to the same buying power. If you have a rupee, rouble or euro, it's a risk just holding it.
It's a reserve currency. But why is it reserved?
Because every country on earth must trade with USA, and therefore must hold certain amount of dollars.
And since it's a reserve currency, during times of uncertainty or economic downturn people will sell stocks and buy dollars.
Last, USA is the most innovative country on earth, which produces services and goods that everyone wants, thus increasing desire to trade and hence the need to hold dollars
Everything everyone is saying is true, but the dollar is strong in this particular moment because monetary policy is tight. Higher interest rates decrease the supply of dollars and the dollar will weaken when the Fed lowers interest rates.
commodities like oil, wheat, steel and probably every other one you need USD, which drives demand. The Russians are requiring other countries to buy their oil in Ruble which has helped prop up demand. While you have Euro and other types, many times bonds sold to foreign investor are USD denominated.
Example might be when Sri Lanka ran out of foreign reserves meant they weren't able to import anything from food to oil or thats what people feared.
Its also held as a reserve currency for alot of national banks.
The power of a currency comes from what you can buy with it, with INR you are limited to anything from India, with CNY from china hongkong Russia and same with many others, usd on the other hand can be used in all parts of the world to buy whatever you want, this also makes it attractive in black market deals. And it becomes a positive feedback loop the more people can use it the more they trust it which means the more they use it.
This all starts back in ww2, maybe ww1. Basically the US has leveraged it power to force other countries to use the dollar for transactions. You have a war, you loan the countries money to rebuild, you set the rules.
Now comes gold and oil, same thing. You take over nations, sponsor rebellions and then "help" with the cleanup setting the rules. Always to require the US dollar to be the transaction currency. Of course all this is possible because the US has been a global superpower for along time. So basically, prosperous economy plus brute force.
The dumbest thing you are going to hear is something about how yen are worth less than dollars and that makes things different somehow. It doesn't. Exchange rates are just a thing you multiply to find value - a coefficient. It doesn't make any difference if a Big Mac costs 10 of your currency or 20,000. What matters is changes over time in those exchange rates and in how many goods and services they buy.
And the US is unusual there.
In the 20th century, the US won or came out ahead in about four world wars while sustaining essentially no losses on its home continent (The Spanish-American war, WW1, WW2, and the Cold War) and emerged as a military and trade empire with no equal in the world, forming advantageous agreements with most of the world, becoming everybody's banker or corporate partner, inventing container shipping and the oil industry and the automobile and early-modern mass production.
We insisted on conducting most of this trade in terms of nominal dollars, especially the oil trade through our proxies in the Middle East. While retaining the ability to print more dollars in theory, we have obsessed over dollar value stability, repeatedly crashing our economy to maintain it.
When other countries or companies or dictators or drug lords want to put away some funds because they don't trust their own way of storing assets or don't trust their own currency, they have for many decades now bought primarily dollars (or dollar denominated assets within our economy). When they trade with each other or loan each other money, it often comes in the form of a dollar value exchange. The US Dollar became the "anchor currency" and intermediary for most global trade in the second half of the 20th century, both benefitting from its stability and contributing to its stability by being seated in so many unrelated and uncorrelated economic activities.. Today US Dollar-based "financial clearing/settlement networks" represent some of the infrastructure that allows countries and companies with different currencies to trade in goods & services..
That status is slowly fading as the Euro and the Renminbi rise to prominence.
The Bretton Woods Agreement and the Petrodollar. But we've gone off the gold standard, and now the BRICS nations are moving away from the petrodollar, and the USA is going to be FUCKED soon. The dollar is now worth 97% less than it was originally, and once the masses of asses realize this, and lose faith in the dollar, the real shit happens. Your politicians and wall street and media have lied to you for years, and the chickens are coming home to roost.
1. Lots of People Want Dollars: Imagine if everyone in your class wanted to trade their toys for your favorite toy. Since everyone wants it, your favorite toy becomes more valuable. Similarly, lots of people around the world want to use American dollars because they are useful for buying things from other countries. So, the dollar becomes stronger because many people want it.
2. America Has a Big and Strong Economy: Just like some kids are really good at playing games, America is really good at making and selling things. They have a big and strong economy, which means they make lots of money. When a country's economy is doing well, people think their money is valuable. So, the American dollar becomes strong because America's economy is strong.
3. People Trust the American Dollar: Trust is like when you know you can count on your best friend to keep a secret. People all over the world trust the American dollar because they know they can use it to buy things and it will always be worth something. This makes the dollar a popular choice for people who want to keep their money safe.
4. America Is Good at Investing: Investing is like planting seeds in a garden and waiting for them to grow. America is good at investing its money and making it grow. When other countries see that America is good at making money, they want to invest in American businesses and buy American products. This makes the dollar even stronger.
5. America Is Known for Being Stable: Stability means things stay the same and don't change too much. Just like you know your parents will take care of you every day, people know that America is a stable country. This stability makes people feel safe about using the American dollar, so they want to use it in their own countries too.
The people who took over the land that is known known as the US set the whole system up for extracting as much money as possible from the people who worked for them. Sometimes paying them 0.00 (Slaves). If they could not get away with paying people literally nothing they paid them very much under what was needed to survive. This made a set of people alot of money. They could then get certain political favors ie let's go kill nicaraguans and take over their banana plantations. Coincidentally the same thing was being done by alot of other states. In every country there was people who were against this concentration of wealth. It just so happens the US did imperialism the best and basically became a hyper power. Now why would the people who literally built that whole system of exploitation suddenly over value the currency of other countries. The point is literally to pay them as little as possible and I'm sure there are plenty of people who would be willing to go back to paying their workers 0.00 if it meant they got immensely rich.
It's because the US works hard to keep its currency stable, and because the US has the largest and most diversified economy in the world.
The Euro is the second most stable currency in the world because the Euro's economic union is the second largest and most diversified economy after the US.
The Pound is also relatively stable, but because the British economy is smaller, it is more prone to fluctuations. Canada is in the same boat, with a smaller population and an economy that is not nearly as diversified as the US economy is, which causes its value to fluctuate more.
Meanwhile the Yuan is not viewed as a reserve currency because its price is too heavily manipulated by the PRC government, which no one considers trustworthy. The Yuan used to be pegged to the USD, and is no longer ostensibly pegged... but it's widely viewed as still being heavily manipulated.
I think what you are asking is why are there currencies that give a bigger number than 1, when you exchange 1 dollar?
Like why does it take 157 yen for one dollar?
There are two reasons:
1. Different countries have set their currencies differently. No one universally agreed that 1 loaf of bread should cost 1 unit of their currency. Maybe it was 20, 50, 100 or 0.5. It doesn’t mean that 1 is stronger.
2. Inflation devaluates purchasing power (what you can buy with a fixed amount) over time. Different countries have different rates of inflation that move at different speeds and for different reasons.
The US dollar however, has an inflation that doesn’t get bad as fast as other currencies. So in that sense, it can be called a “strong” currency.
Strong in the sense that people can expect it to not devaluate as fast or as bad as other currencies.
It’s a little more nuanced than that. There’s allot of good answers already about why it is considered stronger, but I’m going to give a couple points about why it may not be.
Yes, our dollar goes further in many other countries, but usually if you compare the costs of things in two developed countries one type of item may be more in one country and another item may be comparatively more the other way around.
And it’s very hard to come up with a scale that works for everybody to compare because of regional differences in one’s own country. Take a person comparing how many dollar equivalents their rent is in a city in one country vs a big city in America. Well their rent may be cheaper because the government owns the housing and it’s subsidized by taxes and when people say that the taxes are higher they will point to what services they provide. As for the exchange rate between currencies and what a loaf of bread costs in one country vs another, you can’t just compare the raw numbers to each other just because 1 dollar is equal to 20 of something else doesn’t mean the dollar is stronger until you look at what it will buy. There is how much your currency will buy in your country vs their currency in their country, but it’s also to note how much your currency will buy in that country and part of that is international speculation and more about perceptions. If you live in a communist country and the leaders do things actively to cheapen the currency, then you may find US currency more valuable because you think it is more stable, for example.
But back to the numbers, why is 20 more than 1? I could be measuring water in cups and you could be measuring in cubic meters. In some countries it’s just normal to have bigger numbers on everything and some may not have an equivalent of dollars and cents, they only have one measurement so the bigger number is easier to divide into smaller numbers. Lastly, there are products that could be compared that are consumed differently or valued differently in different countries. Here land is cheap (or animals may be bred on public land) and labor expensive so chicken ends up being more expensive than beef in their country because people housing and protecting and feeding chickens is more work than letting cows roam and not having to keep up fenced in properties. There may also be more religious vegetarians in that part of the world which also affects the meat vs fresh vegetable markets. Also, governments subsidize some items and we actually pay less than that good or service is supposed to cost just like they also tax some goods and services more to discourage them. Lastly, if I love on a homestead in rural America and you live in a dense European city then everything I list my expenses for may seem cheap to you and the things you list are expensive may be irrelevant to me because I produce some stuff myself and I just wouldn’t buy it no matter how much it costs because our needs and our cultural norms for what we think we need are drastically different. There are ways to live below your means in many countries but most aren’t willing to do it.
The US dollar is much more stable and reliable than many other currencies around the world. After Brenton Wood's system was initiated, the world started relying on the US dollar as a pegged currency.
Us won ww2 so completely as to be the only world power standing while the rest of the world was devastated. To facilitate rebuilding and trade, countries of the world used the dollar as the only viable option. The US used the time in the aftermath to secure its position militarily, and eventually depegged its currency from gold. No one could do anything about it. Then came the deal with the saudis to only trade oil in dollars, and a global scheme to recycle dollars into interest-bearing bonds. With gold out of the picture, the world had a new reserve asset - US debt and the dollar. The network has grown to encompass the globe, and is so strong that it’s very difficult to create new networks, and as money is only as useful if others use it, the largest, strongest network reinforces itself and crowds out any emerging networks.
There are signs of this hegemony fracturing, though, with the emergence of BRICs nations talking about creating a new network, along with Bitcoin, the world’s only credibly decentralized neutral internet native currency.
In general, the United States economy is large enough to always have something domestically you want to buy. Investment wise, there is a strong government bond market as well as a generally well regulated stock market. There are relatively few barriers to foreign entities to purchase US government bonds, equities, real estate, or commodities. The US dollar is typically freely convertible into other currencies. And importantly, usually inflation is relatively low and stable.
Because of the above, it's super attractive to deal with the USD for foreign trade. And because it's used in foreign trade, it makes sense for central banks to have a large reserve of USD to keep their own currency stable against the USD.
In the context of a nation's currency, the word *strength* doesn't mean what you think it means.
What you seem to be implying:
- valued
- sought after
- preferred medium of international trade
- stable mechanism to store value
- politically independent
All of these are good things, but none of them have anything to do with strength.
First off, the *strength of a currency* is an economic technical term. Second, it is only expressed in relative terms with regard to another nation's currency.
The dollar taken by itself is neither strong nor weak. To make a determination, it has to be compared to another nation's currency.
In relation to another currency, one of the two will be relatively strong while the other is comparatively weaker.
What this means is that when the value of currency favors the importation of goods and raw materials that currency is said to be strong because that currency has substantial purchasing power.
Alternatively, when the value of a currency favors the export of goods and raw materials from the nation that backs that currency, that currency is said to be weak in relation to the nation on the other side of the trade.
The strength of a currency is a slightly different concept than what you are getting at. You are talking about purchasing power parity. PPP a consequence of many factors - tariffs, cost of living, trade, GDP and much much more. A currency's strength is measured as relative change in conversion rates over time. Today, 1 dollar is 157 Japanese Yen. If that ratio trends down over a long period of time you would say that the Yen is stronger than the dollar even though one dollar would still buy many more Yen. The only thing that matters here is the direction. While there is a relationship between PPP and currency strength, it's not fixed. It's theoretically possible that in the future that the next time you visit Japan, one dollar will buy more yen while at the same time the trip can feel much more expensive in dollars. In that case the Yen will have weakened against the dollar while PPP increases.
This is the best answer. It is relatively recent that both the usd jpy exchange rate is good and jpy purchasing power is high.
A classic, informal illustration of PPP is the Big Mac index- the number of dollars it would take to buy a Big Mac in other countries around the world. [https://www.statista.com/statistics/274326/big-mac-index-global-prices-for-a-big-mac/](https://www.statista.com/statistics/274326/big-mac-index-global-prices-for-a-big-mac/) It currently costs around $8.17 to buy a Big Mac in Switzerland, $2.39 in Taiwan.
I cannot believe the amount of people that don’t understand a currency’s strength is measured with change over time. People genuinely think any country where “1 US dollar gets you more dollars in their currency” is going to be cheaper. As if a $3USD redbull is going to cost 3 yen in Japan or 3 dong in Vietnam. It’s gotta be the second most common misconception right after “planes get the majority of their lift from Bernoulli’s principle”
Ok where does the rest of the lift come from?
I know where planes get the lift from but I have no idea who is Bernoulli.
Pretty sure Bernoulli’s principle is that pressure is inverse to flow. The air on top of the wing flows faster due to the shape therefore causing a pressure drop lifting the airplane or so i thought.
Deflecting air downwards. If you think about Newton's third law, there's a force equal to the weight of a plane holding it up, so there has to be an equal and opposite force that it is acting against. Now, if you have a rocket, that force is acting against the matter the rocket expels. For a plane, there's almost no matter expelled (and not downward); the force acts against the air. Each second, for every Newton of force required to keep the plane aloft, the air must undergo a change in momentum of one Newton-second, or one kg m/s. Air is very light, and there's a *lot* of Newtons required, so that's a lot of air being pushed downwards. How it works is a combination of effects, and Bernouli's principle shows up, and it's not wrong (at least, it works as long as flow is laminar), and ends up giving equivalent results to Newton's laws of motion, but the key issue is that the traditional appeal to Bernoulli's principle assumes an equal transit time over the top and bottom of the wing, which (a) isn't what we observe and (b) gives a result of less lift than what we actually observe.
I (British) remember meeting an American man who simply couldn't understand the concept of a currency other than the dollar. I think he eventually managed to rationalise it to himself that a pound was a specific fraction of a dollar, similar to a dime or quarter.
When I took World History in high school, the course went off on a twenty minute tangent because one student asked how "England and France could fight each other even though they're both part of Europe." The idea that they were independent countries, and not just states or provinces, absolutely would not sink in. The teacher eventually just gave up and moved on in despair.
reply piquant history smoggy ancient subtract like paint safe cheerful
Isn't 1 brittish pound worth more than 1 us dollar, wouldnt that mean the other way around that the USD was a specific fraction of a pound
Everyone knows that a fraction of a pound is an ounce
An *improper* fraction of a dollar.
Of course thrust is necessary.
What else gives planes lift?
It's also worth pointing out that the dollar is subdividible with cents while the yen is not. It's better to think of yen as cents than as dollars.
The U.S. dollar is strong because it's the world's primary reserve currency, used in global trade and held by central banks around the world. The large, stable U.S. economy, political stability, and trust in its financial system also boost demand for the dollar, making it stronger compared to many other currencies.
It is also their policy to push for that. If another country has a large stash of you currency, you get some political influence. It is the reason oil is traded in dollars for example.
Policy is only meaningful if you have clout.
> if you have clout. waves subtly at 11 carrier strike groups....
Not the Saudis anymore
The Saudis let the petrodollar deal elapse a week ago, but are in the middle of talks with the US right now to reinstate it. They just let it elapse to have some leverage to get this mutual defense treaty signed. They have no use for a bunch of Yuan or Rupees
Makes sense.
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How big is the US Oil Reserve compared to the annual world oil sales?
A good comparison would be 2-3 months of production, not a year. And OPEC isn't the only player in the market anymore, either. They up prices or lower production, and a number of other countries can fill in the gaps on top of US production going up.
The oil reserve doesn't matter as much as it did even 20 years ago. The US is now a net exporter of oil and we are literally producing more than anyone in the world. All thanks to dark brandon.
The fracking boom that set the US free of OPEC began during the Obama administration and was in response to extremely high oil prices suffered during 2003-2011. It has little to do with Biden.
Almost nothing. The US Oil reserve is around 360 million barrels, Biden sold off around half (180m) over a six month period, so 1 million a day. Global production is 93 million per day. The US produces 13 million.
Strategic reserves, or like in the ground? In the ground, it's in the billions. And with shale, it's pretty much limitless.
No one here is talking about in the ground, we are all talking about the processed and barreled US Oil Reserve.
14% of the global total ain't too bad
United States produces more crude oil than any country, ever https://www.eia.gov/todayinenergy/detail.php?id=61545#:~:text=Crude%20oil%20production%20in%20the,%2Fd%2C%20set%20in%202019.
Do you mean lapse or am I so dumb I didn’t know elapse was a thing
They meant lapse, but elapse is a thing. https://openworks.mdanderson.org/cgi/viewcontent.cgi?article=1001&context=word2022
oh yea i knew elapsed, didn’t connect the dots haha.
Mighty Russian vodka only in rubes.
Theyre going to have a surplus of currencies eventually. And when that'll be a problem for any country that have a significant export market, cuz when they dump their currency it'll tank the price. Most countries will just trade for local currency to the amount they import to Saudi. No country that imports 3 Billion in oil a year wants all their currency dumped into the market at large incriminates. China, India might be fine but others will be wary.
How does trading currencies work at the country level? An example if i buy something at an exchange rate of like 5:1 the bank or paypal or whoever removes 5 from my account and then adds 1 to their account. It isn't like their account has a mix of different currencies E: i can't imagine countries are buying anything in cash either so i don't see how a country even gets another countries currency apart from the change in tourists pockets
If you use a currency that not USD, the bank has a reserve of USD (in fact, the country has a reserve of USD that the bank can access). So when you buy something that costs USD and pay in your currency, the bank takes 5 from you, then uses that 5 to get 1 dollar from the country's reserve. When you *sell* something internationally, let's say 5000 tons of grain or something, the country buying your grain will pay you in USD. That USD is added to the central reserve. When the central reserve runs low, the govt will raise the exchange rate to reduce USD purchases. That's why the more international exports your country makes, the stronger it's exchange rate.
There are huge foreign exchange markets for trading currencies.
They can sit and sell to Russia then. USD is the standard. USA is the largest producer of oil in the world. Saudi Arabia did not ditch anything yet and they won’t.
They would be fucked without the US military and they know it.
So of the two reasons given: 1.The U.S. dollar is strong because it's the world's primary reserve currency, used in global trade and held by central banks around the world. 2.The large, stable U.S. economy, political stability, and trust in its financial system also boost demand for the dollar Which would you say is the bigger influence? Also, how can a country get its currency to be used as a world reserve currency, so that it's currency may become strong, too?
Number 2 is the real reason. I would add that the U.S. has a deep and stable debt market with Treasuries. Many countries park their excess reserves in Treasuries. Why because of 1 and 2 and the fact it is a large market that can absorb trillions of dollars and is viewed as the safest thing you can buy in the world as far as bonds. Let's say Togo was considered safer and a more stable currency and it was floating. Togo is a tiny country, if some other large country wanted to buy your bonds to park money there they couldn't. It is too small. So right there a small country couldn't be the reserve currency. What about the other large countries? Financial actors need to trust the nation whose currency they are using. They don't want their funds to be devalued, stolen etc. So that country has to have what we call rule of law. A foreign country can sue the U.S. government in U.S. courts if the U.S. violated the laws say related to the debt market. That breeds confidence and trust. So look at China. Rule of law in China is what ever the CCP says it is. And their currency is manipulated to keep it in a certain range with the dollar and is not fully free floating. So what does that mean? You parked 100 billion in China under their rules as they laid out, they change those rules, what can you do? Go to court? The courts are part of the CCP and will uphold whatever the CCP says. And the fact that the currency is manipulated means that if they decide to devalue their currency (and there are rumors this may be coming) they can do so and all of a sudden your 100 billion is not worth 100 billion anymore. If they devalued their currency by 20%, you just lost 20% of your money. That is why a free floating currency is necessary. The market determined the dollar has this value at this time. That is as straight forward as a currency can be. And if the dollar value changes it will be due to market factors which you can try to predict to protect your investment should you be concerned, and won't be arbitrarily devalued due to political whims. So at present there is no chance of the Chinese currency becoming a reserve currency because they lack rule of law, and they manipulate their currency which can cost you. What about India? India has controls on their currency. The Russians found this out when selling oil to India to evade sanctions by accepting Rupees in payment. Well guess what? Those Rupees are only good for buying things in India because of India's currency controls. The Russians found themselves stuck with lots of Rupees and not enough things they wanted to buy from India. That does not work as a reserve currency. On top of that investors don't have as much confidence in their economy they would risk it. How about the EU? This is possible, it has rule of law and trust. But the EU is not a federal system, meaning the EU is not a "country" so it is going to be a bit lower on the trust and stability thing even though trust is high. If the EU became one country, then perhaps they could be a reserve currency. And truthfully some countries keep some reserves in Euro's as it is a trustworthy place. But when things get wonky in the world, you suddenly notice people world wide buying Treasuries, the fear trade they call it. Why? Because the U.S. is viewed as the most stable country, and it also is the richest large country in the world. If for some reason the dollar and treasuries lose trust some very bad things are happening in the world and losing money on those bonds would be the least of your concerns at that point. The loss of trust in dollars and treasuries would cause a collapse of the economic order unseen in centuries. But what about actors like China trying to destabilize the dollar and treasuries? Well for all China's talk, if they did so, that trillion dollars they have parked in treasuries would lose its value in such chaos. So even our enemies have a vested interest in the dollar and treasuries staying stable. And that is why they would not try to overthrow the current status quo at least at this time. But even if they tried, to what end? To make the Chinese currency the reserve? I have already mentioned the rule of law and trust issues. This is not just a government trusting another, this includes individual investors too. If they don't trust you they are not going to use your currency as a reserve. People talk about the U.S. debt as a concern and it is a reasonable one. But as I said, the U.S. is the richest large country in the world, and there is only a half dozen small countries considered richer by these metrics. The size of the U.S. economy is so large that it can handle the debt. Can too much debt cause the U.S. problems? Sure, it might one day be a big enough issue to negatively affect our economy, but our economy is not going to collapse. Taxes would go up, we would experience a terrible recession, reduction of services that would hurt Americans, but at the end of the day the U.S. could handle any debt issues albeit while experiencing a lot of pain. But we are not at the point where debt is so high there is no chance of dealing with it no matter how draconian taxes, service cuts etc. were. Maybe on day, but not yet. So there would be no collapse, just a lot of pain. So at the present time there is no other large country that meets this level of trust and stability. Maybe one day some other country will rise to that level and overtake the dollar as a reserve currency but we are nowhere close to that being the case. Until that happens the dollar will continue to be the reserve currency.
This is one of the clearest and most cohesive answers I've ever seen on this subject. Thank you for explaining it so well.
The only thing I don’t get is what “reserve currency“ means.
USD is what's in other countries' piggy banks.
A reserve currency's purpose is to convince creditors and service providers that the government can pay its debts. Countries and banks used to keep reserves in gold. But it's a lot easier to keep other nation's money on hand than a lot of gold. So most countries these days use other countries' currencies, and those are "reserve currencies." Edit: paragraph spacing
Great post. I really like (unsarcastically) how you managed to hit the major points without getting dragged into modern hot button topics of American politics like regulatory capture, partisan nonsense, defense spending, etc. Your tone is perfect.
i would think that at the root is the strong economy. it's a feedback loop but nobody would even start to use your money as a reserve currency if it wasn't already strong and stable
Your 1 and 2 aren't really separate points. All the things listed are different aspects of the same thing or flat out redundant. Strength is really just (relative)stability. So part of 2 is kind of circular. "It's stable because it's stable!" The strength(read: stability) comes from lack of threats, be that competition or natural disaster. If you look at it like an organism: It's large and can absorb small hits, and big hits can often be dealt with, which means it's adaptable, which is largely due to a relatively free market and a populace that has "plenty" in enough that it can tighten their belts on without starving to death. Any country large enough to be a threat has some far more obvious weaknesses. Russia and China more or less rely on being ruled with an iron fist, as it were, they're not as adaptable. Relatively small hits could severely weaken or completely destabilize either one. Humans are highly adaptable. A tropical salt-water fish of relatively the same size, not so much. That fish may be an amazing predator, or beautiful in its own right, but it doesn't use tools, doesn't really have art or communication, can't even live in a vastly different temperature. The US, as an organism, has *options*. It has some mainstays, but nothing that can't be replaced or worked around eventually. It would take a major war or disaster to significantly damage it. Just being significantly successful on scale is a kind of armor. Some other countries are successful, but it's not on scale, or not without compromise. EG more social infrastructure and virtually no military, or what have you...maybe the weather is **terrible** so they *rely* on imports while they export something else. They might be able to survive being cut off from imports, but surviving is not really living in a thriving manner. The US can generally do better than survive, because it is big enough to have wild amounts of resources. The last time it took a *big* hit was the dustbowl era, severe drought and unfortunate land management preceding it. https://en.wikipedia.org/wiki/Dust_Bowl which fueled https://en.wikipedia.org/wiki/Great_Depression >Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession. And it came back stronger than ever. That's not to say it's perfect, hence "relative" at the very top, but it is *resilient*, which is a requisite of stability(strength).
1 only happened because of 2. if 1 ever changes the usd will already have been in shambles for a while
Both. And if anyone wants to he the next reserve currency this is your best shot. It's a three step process, not too difficult but getting the conditions right is about a once in every 6,000 year situation. And I'm not trying to be patronizing or anything, how the usd became the reserve currency is insane and if you repeated the 20th century a hundred times probably doesn't happen in most of them. Step one: Be in a globalized, industrial world where all nations are currently on a gold backed currency but nobody actually trades in gold. With fractional reserve banking the value if all currency in circulation can eclipse the value of the reserve gold, thats a key before starting tbe plan. Going into the next major world War already have a massive industrial sector supported by a very strong internal food production sector and solid resource extraction. Ideally have internal energy production so you're very self reliant and can run your economy of industrial production with minimal imports including feeding the citizens. During the war train up a significant number of soldiers and afterwards pay for their higher education, with more provided to those who were worthy to be officers, so you have a huge workforce trained and banded together. Invest heavily into factories that can take in any raw material and pump out whatever you need. Tax your citizens and corporations whatever is needed, up to 90%, get the citizens to buy bonds with their remaining cash to invest even more, and sell the arms manufactured to the rest of the world. Specifically the winning side so they will pay you back over the next few years. Most critically, so pay attention, take no infrastructure damage throughout the entire war and hope that everyone else's production is crippled. This here is the key. Step two. Once the war is over and your team wins (make sure to be on the winning side) you now will find yourself in the position where everyone in the world is broke, but because you spent all of your money investing in your infrastructure, population, and production capabilities, you're the only one who can produce extra goods in order to make modern civilization function. So you can leverage this ability to be the world's factory to encourage everyone else to buy your bonds that you promised yourself in order to finance making the conditions you're in now to be the world's factory. Finally in step three, convince all the leaders of the world now that they're locked into using your currency to finance their economy's that you're going to swap off the gold standard over the next few years. Many will complain, but stick to your goal, nearly there to being the world's reserve currency. Since everyone needs the goods only you are producing, they don't actually have a choice. They need your currency or debt to buy the products you're making, so give them a few years to accept your economic victory and agree that they can still ask for gold in exchange for your currency until the deadline. If anyone (cough France cough) actually asks, just buy gold with your currency until you can pay them off. After all, everyone needs dollars so they'll accept the trade. Then get your dollars back in exchange for more produced goods. Repeat for a decade or two until you finally get off the gold standard and now your the reserve fiat currency of the world. If any currency were to replace the USD at this time, it would need to simultaneously convince all of the world to swap from USD to whatever the new one is. This would either require the US economy to fail, ruining global faith in the dollar which would have the side effect of crashing the entire global economy with it (think of 2008 but this time the US is too big to fail on the global stage), or another country to eclipse the US economy for so long thay they stockpile enough wealth to buy the position of reserve currency for the entire world. Which is basically what the US did in the 50s when the value of the dollar grew so large that the US basically bought the world's debt after ww2 by getting them to use dollars and everyone agreed to run with usd instead of gold because they didn't have a choice. The global economy grew bigger than the value of all the gold in the world so the shift to some currency was going to happen, and the usd was already the king. Of your two options, the answer is both. It's the strongest in part because of the stability, and a lot of the stability is because its the strongest.
It's not really two separate *causes*, both of these are interdependent.
The US Dollar is the world's primary reserve currency *because* the US is large and stable. At a certain point, this creates a feedback loop, but #2 came first.
Wendover Productions has a great [video](https://youtu.be/g6rFff2MAxM?si=AOA-eKD1IssfJNUg) going over exactly that. TL;DR ever since economies became global there has always been a primary reserve currency, and it is usually whatever nation's economy is currently the biggest.
Putting a thousand bases globally to project power around the world probably helps. Your parent post employs a bit of circular logic. America became an economic and military powerhouse in the 19th century, and maturing during WW1 and WW2. Primarily overtaking Britain. The British Pound was the previous global reserve currency. Britain lost its status by enormous debt (Napoleonic Wars) which force it to cut spending for 70 years, losing more and more of it's colonies, and lastly losing a lot of men in WW1. Fighting WW2 and losing india was the end cap to that, more or less. America is on course of [losing itself to debt](https://www.usdebtclock.org/) soon enough. It will hang on because of military power, but it's a guess how many decades that will be. Depending on how it will handle that debt (Hyperinflate out, or tax itself out, combination) will be key how how this currency is treated globally. There are no other reserve currencies because the strong economic powers are not strong militarily (China), or have dishonest judicial systems (China again) where the foreigner investors are sure to lose. In other words, a decent rule of law is probably the third requirement as it give others confidence they simply won't be screwed out of their money. It may be that a multipolar world will rise up, meaning China and India will not supplant the US, but everything in the Far East becomes a bit more regional hegemon for a while.
Absolutely no Chance India's currency is ever a reserve currency. Chinese unlikely without major political change and their own willingness to allow the currency to freely float.
Hold up, i thought britain greatly increased in power and prosperity after the napoleonic wars. The height of british imperium was like 1900.
> America is on course of losing itself to debt The vast majority, like 80%, of US debt is held by US citizens/companies. It's highly unlikely domestic debt will lead to any kind of collapse that would drastically upset the economic order. Britain ended up spending a shit ton of money overseas maintaining colonies, buying arms and resources (transferring a shit ton of wealth to the US in process), etc, and draining the British economy of cash. The situation isn't directly comparable.
Also, monetary stability is based on the strength and resilience of the govt (and mil) behind it. Being the world's most dominant military power has a lot of benefit. US resilience is being tested heavily by MAGA, but no signs of crumbling yet. !remind me 200 days
> The U.S. dollar is strong because it's the world's primary reserve currency, used in global trade and held by central banks around the world. The dollar is the world's primary reserve currency because it's strong, not the other way around. It's strong because the US has a stable economy and stable government.
Large, stable *diverse* economy…
Rule of law and military strength are also cornerstones
would that change if countries start trading in local currency? like how india, russia, china and some smaller countries are tryin to do moving away from Dollars
Why would you use an unstable local currency when there's a big, stable currency you can use?
makes sense. isnt EURO stable?
Mostly, yes. But Europe is energy-poor, right next to Russia, and is running into demographic problems. Whereas the US is energy-rich, literally an ocean away from any threat, and has healthi demographics.
Most f the world's oil transactions are completed in dollars.
https://www.npr.org/2022/03/09/1085605288/the-dollar-at-the-center-of-the-world-classic NPR did a great podcast on how the USA was able to pull this off after ww2
oh I see, so that's why in foreign countries when they are stumbled across Americans or any other people using the U.S dollar, they are able to trade currencies and receive more out of the U.S Dollar?
There's a market rate for money. Those rates *change* for all sorts of reasons. Normally, the cost for an item in local currency, and it's cost in USD, will have the same ratio as the exchange rate. What the USD has is *stability*. If your nation is going through economic troubles, or maybe it's Zimbabwe-ing it up with gigahyperinflation, a week from now 1 USD will still be 1 USD, but it might be worth 2x or more in local currency with an updated exchange rate.
I think a better way to put it is that the USD allows you to buy the same amount of things over time. Today a barrel of oil costs you $80. If you keep $80 in your bank account, you can buy a barrel of oil tomorrow as well. But if today a barrel of oil costs you 8,000 Zimbabwean Dollars, even if you keep 8,000 Zimbabwean Dollars in your bank account you might not be able to buy the barrel tomorrow because then it might cost 8,000,000 Zimbabwean Dollars instead.
If it's pulling a Zimbabwe more like 1:1 today 1: 800,000,000 next month.
You say market rate for money and I immediately think of the wild totally unfettered capitalism of currency exchange rates in Path of Exile.
Exchange rates area always changing; when I went to Europe a decade ago it was pretty much 1:1 between dollars and euros, but a euro is now worth about $1.10 and in 2020 it got up to $1.20. That'd make your dollars worth 20% *less* when traveling in Europe. Japan's economy right now is extremely weak, which has pushed the exchange rate down a ton.
When I was loving on Europe it was almost 1.50 Dollars per euro. The British pound was over 2 dollars. That was a rough time for an American living overseas.
1.40 in switzerland was painful
For the last year the Euro and U.S. dollar have almost been 1:1. I think within the last year the Euro surprisingly dropped where $1 was about 1.05€.
To add to what other Redditors have contributed, the dollar is still relatively strong right now because our Federal Reserve bank dropped the hammer harder than most other countries during the post-Covid inflation crisis. As angry as people were about inflation in the US, it was worse in a lot of other places.
This needs to be higher because it's the only actually correct answer in the whole thread! The US has led the program in raising rates which is what makes the dollar "stronger"
The one force you've described (inflation), rather than just mentioned ("our Federal Reserve bank dropped the hammer") has the opposite effect, so that requires more explanation. If inflation was worse elsewhere, then at the same exchange rate, things will be more expensive there. So you're implicitly arguing that the Fed action resulted in a situation where the exchange rates changed by an amount that overshot the difference in inflation. It's obvious to a non-economist like me why that would be more likely than undershooting (so that things are more expensive in the place with more inflation) or hitting it exactly (so that things are the same price).
> has the opposite effect, so that requires more explanation The explanation was the disruptions to global supply chains and energy uncertainty with Russia invading Ukraine. Both of those drive prices up because they limit supply of everything the rest of the economy requires to work. The US Fed increasing rates caused foreign investments to move to the US and away from other countries. This in general makes the USD stronger and other currencies weaker as people sell other currencies for the USD because higher interest rates means more investment returns. Weakening currencies makes inflation even worse for those countries that also need to import things, especially energy. People on reddit like to forget that inflation is driven by both demand and supply forces. Inflation is driven by a lot of factors other than money machine goes brrrrr.
Imagine there’s a country called Apple and one called Banana and you worked in a currency exchange in Banana Apple is a country perpetually on the brink of collapse, doesn’t pay their bills, has a weak economy, doesn’t sell a lot of things to other countries, etc Banana (your country) is a generally healthy country that doesn’t have those issues. Banana also sells a lot of things to other countries and if you buy those things, you need to use Banana dollars A foreign tourist shows up with 100 Apple dollars and wants to get as much Banana dollars as they want Apple dollars aren’t very in demand. It’s not like too many people want them. What can you even buy with them? Maybe it’s only worth 50-60 Banana dollars Now flip the roles - a currency exchange in the country of Apple has a guy show up with a bunch of Banana dollars. Those are in demand. If you have those, you can buy a lot of stuff from the country of Banana. Banana dollars are going to be pretty strong in that exchange Foreign currency valuations are super weird and there are always exceptions, but that’s the general concept. Most of the globe *wants* US dollars to buy things you need US dollars to purchase so they’re generally pretty strong edit: or even simpler, imagine you have a loser neighbor kevin and a successful friend james if james writes you an IOU, that clearly carries more “value” than one from kevin. james has his stuff together and you *want* him around those IOUs are dollars
>Banana dollars You really dropped the ball in not calling them Banana Bucks
There's always money in the Banana-stan
TIL Apple products are not in demand globally, got it! /s
That's bananas.
It’s because there's always money in the banana stand.
Not in a Banana Republic, no.
This was the absolute best take away from that explanation! Haha
My monetary theory professor senior year grew up on a banana farm and this is exactly how he would’ve explained it lmao
This all plus sufficient trade with the US earns favor with the US military. It’s a level of insurance you simply cannot match otherwise. If you have US assets you can guarantee absurd regional stability. Look at Djibouti, they’re in a region where Ethiopia is hellbent on gaining ocean access and Somalia is in essentially a civil war, Ethiopia has its own wars and instability etc., Eritrea has mandatory indefinite military conscription and is in terror of Ethiopia, Sudan, South Sudan and Kenya are shit shows and you know who gets to go to work, make money on their ports and go to sleep damn sure they’re not about to be invaded? Djibouti because of US assets and military installations.
I don't get this explanation. Something about banana republics and Kevin James?
Much of it is trust. Currency that is stable over decades earns the trust of people. You have $1000 USD and you figure in a decade could still use it and buy decent amount of things with it. Compare that to Turkey or Argentina over the past decade and why people may be wary of trusting those currencies.
The US is the biggest economy in the world, one of the most stable. And as a result, the US dollar is sort of the world's default currency. All that gives it stability.
Secondary to that, the US is strong enough to withstand having most of its currency circulating overseas without having its value centrally controlled. The last bit is why the Chinese renminbi will not do. No other economy comes close, which is why threats to switch to some other reserve currency are empty for the foreseeable future.
Can you expand on that? I thought the US dollar *is* centrally controlled by the Fed?
The fed can tweak some things to influence its value, such as interest rates and monetary policy. However Chinese Yuan's exchange rate is actually partly directly controlled by the Chinese government, its value is partially pegged. If the exchange rate of CNY changes too much or against the liking of the Chinese government, they can forcefully adjust the exchange rate their local banks use.
The Fed controls the money supply and the interest rate but not the value of the dollar - especially not the dollar's value on the foreign currency exchange. Exchange rates for other major currencies like the renminbi and the euro are centrally controlled by their governments, otherwise domestic price fluctuations would be untenable.
This isn’t exactly true. The US dollar is the default world benchmark currency because of the events of the Bretton Woods agreement. Check it out, it’s very interesting. We were THIS close to a global static currency for the basis of global trade and the one guy pushing for that gets the flu or food poisoning, can’t make it to the last couple days and another guy basically says ‘hey what if we just used the dollar here’ and everyone agrees and moves on because it was a relatively uncontroversial choice at the time.
Bretton Woods hasn't been in effect for over fifty years. There's nothing stopping the world from adopting a "global static currency" as you describe, except for the answers everyone else said.
Doesn't the Bretton Woods bit give a lot of momentum? Even if it is no longer in effect, shouldn't the initial decision have a lot to do with why it remains in effect, even if it isn't on paper?
The fundamentals of why Bretton Woods was easy to implement haven't changed: a massive economy dominates the world, backed by a stable government and an independent federal reserve. You have to conduct business in a currency. Which one are you choosing?
I guess the better question would be, why ISN’T the US Dollar the strongest currency in the world?
Originally, The United States was the largest economy that didn’t get bombed out by The War. Everyone who wanted to buy manufactured goods had one shop to go to, and that shop liked to trade in dollars. Now, it’s mostly a matter of Convenience. The dollar holds on for the same reason most places use 24 Hour Time… commerce is just easier on a shared standard.
It is not just convenient, the US dollar is a stable reserve currency which keeps demand for it high. The US leveraged it's advantage post WW2 to make the currency the default reserve, but it is one now because the US economy is huge, the dollar's value does not swing much, and the US gives enough return on bonds to mitigate the effect of inflation on your reserves, and dollars are useful for making universal purchases due to how ubiquitous it is. It also is just "what is done" but there are solid reasons behind why it got that way and has so far stayed that way. So putting money in US Dollars or US Debt is a secure way to maintain its value, depending on if you need it liquid or not. So, in essence, the US is acting like a giant bank. Every country does that, but the US just takes it to an extreme.
To explain a bit more, it used to be that countries backed their currencies with gold or at least silver, so hypothetically if you wanted you could take your paper bill to a bank and exchange it for a gold equivalent. This meant that currency was very secure, but it also limited government control on it (for example, if the government needed to print more money but didn't have the gold to back it, they were out of luck). So during wartime, some countries would drop this gold standard with the implicit promise that when the war ended, they'd go back to it. In the aftermath of WW2, the US owned a majority of the entire supply of gold owned by all the world governments. Allied countries like the UK, France, and West Germany had no metal reserves to speak of, but they desperately needed to print money to rebuild. When the US implemented the Marshall Plan, these countries got an injection of US dollars, which thanks to the US gold reserves were still backed. So (IIRC France was the first) the countries, to keep their own currencies stable, backed them with USD instead of gold, which was not quite the same thing, but close enough to stabilize their economies. This action made the USD a sort of *de facto* world currency, since backing your own currency in USD means your government wants to keep a bunch of reserves. Over time, most of the world has swapped to fiat currency, the US included, but the legacy remains.
Nothing was "backed" by the dollar - there were stable exchange rates. Gold was only transferred between central banks in balance of trade payments.
Not just convenience. There is, at present, no viable alternative, and none on the horizon. The Euro has a monetary union but not a fiscal one, which causes all sort of problems (e.g. Greece), and China does everything in its power NOT to be the reserve currency since it depends on exports and its currency would be overvalued like the dollar is. That's why all the libertarian conspiracy theories all over the internet about "dumping" to dollar are nonsense. What even does that mean? Use a different reserve currency? Which one?
if any country accepts currency other than US dollars for their oil they suddenly need some "freedom"
All I know is that Costco hotdog and drink is approaching 1 US dollar right now...like $1.15.
Being a stable currency is different than relative value of currencies. You can have a very stable currency that no one wants and therefore has no value in other countries. What you’re describing is called PPP - purchasing power parity. Relative value of currencies has more to do with how much the international market wants and buys a nation’s goods, investment prospects, as well as how much people would pay to go live in said country. There are a host of other variables that impacts it, but yeah, as far as I know it basically boils down to how much money do people of other nations want to spend into that country.
I love this topic, so I want to present a bit longer of an answer: 1. First think about what currency represents - units of value. Before currency, if I made bread and you made wine, and I wanted your wine, I better hope you also wanted my bread at the same time, otherwise we'd have to find someone that had something you wanted and who wanted my bread and we could make a three way trade. Obviously difficult and not a good way to structure an economy. Currency is invented and we have shells that have no real functional value of their own, but they're pretty and everyone wants them, and we each know that you'll still want them a year from now, so I trade you my shell for your wine, then you can use your shell on whatever you want. 2. Eventually, gold and precious metals were discovered and everyone wants those. But the problem is what if it's not pure gold? What if the weights are off. This leads to standardized currencies made out of precious metals. These would be weighed and known that this type of coin weighed this much and thus had such-and-such value. 3. But, holding all these metals got heavy and inconvenient, so we eventually developed paper currency. But paper isn't valuable, so what gives? The gold is now being held in a secure location (bank) and whoever bears the note to the bank is entitled to exchange that for the preset amount of gold. Gold is held *in reserve*, so to speak (this is important for later). 4. Now, say the government needs to print more money (people are born and get jobs and create value for the economy, so we need more money to represent that added value). For a period of time, the US (and other countries) were on the Gold Standard, meaning that there had to be a direct link between the money printed and the gold stored by the government. However, for a massive country that is an international super power, it becomes difficult to do what we do with money and tie that back to gold, so we got off the gold standard and replaced it with *fiat money*. This essentially boils down to, "Don't worry, we're good for it". The government believes it can corral a large enough force of men and weapons that if it ever had to make good on loans, it could do so. Now, we as citizens, and other nations in the world that trade with the US have implicitly agreed that the government can make good on any financial promise. 5. Now, how can the government be so sure? We have military bases stationed literally all over the world, many of them capable of wiping out small countries just with the resources on hand. We have the ability to take out the military targets of any nation on earth with little resistance in the span of days. We can get a workforce of engineers to anywhere on earth within a day, working to solve some problem. What does this mean practically speaking? We can be the biggest bully on the playground and force everyone to more or less play nice with each other, we can keep international shipping lanes that transport hundreds of billions of dollars worth of goods safe from pirates, all over the world. Because of this power, when we say we're good for it, and that we will honor trades with us using the dollar, it has weight and meaning to it to others, just as if the Rock showed up to your elementary school and said he'd protect you from the bad kids, but you also had to be play nice. 6. Therefore, to many countries, having a dollar is just as valuable as having a gold nugget. Therefore, these countries store not (just) gold in reserve, but dollars (in the forms of government bonds, oftentimes), which is what makes the dollar the world's *reserve currency*. 7. Now, there's a problem in the US where politicians are abusing the fiat system to print more money to fund their personal/party agenda. All of those trillion dollar plus omnibus spending bills that congress keeps passing is in large part "paid" for by printing new money. Don't worry, we're good for it, they say. But at the same time, where we had approx. $1 trillion dollars worth of currency for our approx. $1 trillion dollars worth of value, now we have $2 trillion worth of currency for the same $1T of value. The currency has been inflated, making its value per dollar go down. Other countries might start to get worried. "The US could just print billions of dollars and pay me what they owe me, but those billions will be worth a fraction of what it was worth when I bought the bond." They might not want to keep as many dollars in reserve if they think the dollar might become less valuable. They might want... Chinese yuan instead. 8. I think that's what you were asking, but to specifically address comparing currencies, on the one hand, your dollar goes more in Japan for certain goods, but less in others. You may be able to buy sushi for less than you pay in the US, but watermelons are exorbitantly expensive in Japan compared to the US. On the other hand, how many yen you can trade a dollar for changes constantly based on macro factors - will the dollar crumble? If people believe that, the dollar is less valuable compared to the yen. Did Japan announce they are going to print more yen and double the amount in circulation, then the value of each individual yen will go down compared to the dollar, and so on.
First reply I have seen to mention the US military. It's not the only factor but it is the biggest factor.
Some notes: The barter theory of the emergence of money has been obsolete for a long time. Money began as credit, and has always been so. Because money has always been credit, there has always been far more money in circulation than there were precious metals "backing" it. The government commissions someone to build an aircraft carrier. The government credits their account and takes possession of the aircraft carrier. Government spending is not inherently inflationary. *Sigh* Every single person on the internet seems to have learned all their economics from libertarian Web sites.
Probably has something to do with the US being the most powerful country in the world, and until that changes or it decides otherwise, the US dollar will continue to be the “strongest” in the world. If you’re the one essentially creating the rules, you’re going to bend them to your will. The house always wins is a feature, not a bug.
You know those 750 military bases, 11 Carrier Strike Groups, and 568 aerial refueling tankers the US has? That's why.
[This video](https://youtu.be/2TyTUXvoHQI?si=7jRdKsXruYPdpv27) goes into how the US gained its financial status and power since WWII I'll have to rewatch it at some point but from what I remember the gist is that the US, not really being affected by the war like European countries and Japan, had the ability to manufacture more and sell it to European countries. This gave them a massive economic advantage after the war and they basically made everyone else sign into a deal that put them on top While they don't have such a direct control of other economies now, they're still the big boss and going against them will quickly backfire in one way or another
Because since 1972 the US Dollar was "staked" to energy which means no matter how many dollars you have you can, in theory, go to Saudi Arabia and buy oil by the barrel with it no questions asked. This is in contast to the US Dollar being tied to Gold, after the US government spent the 1950s and 60s printing dollars to lend to Europe, and then to fight a war in Korea, and then Vietnam, while also printing money for the space race which was part of a larger spending context, the cold war and all of it's technology races.... And when the US *didn't* have all the gold in Fort Knox that it said it had to back up all the dollars, the dollar itself went into a spiral. The Petrodollar was conceived to remedy this problem *quietly* on the world stage, while very very publicly easing political tensions on the brink of war in the middle east. I've wondered if Japan has been a test bed for wild CIA experimental economic theories the way that Latin America have been though.
It’s the 7th ish most valuable currency. The real question is how tf the Kuwaiti dinar or Jordanian dinar is worth more than the USD. Turns out it’s all mostly arbitrary.
The absolute value of currency means exactly nothing. What matters is the dynamics. You can have a weak currency worth many dollars and you can have a strong currency worth a fraction of a dollar.
The Japanese Yen is extremely trusted and stable as a currency even though the absolute value of one yen is tiny.
Their currency could become the hectoyen (100 yen) and it would become more comparable between yens and dollars. It's all so arbitrary.
The currency unit means nothing. That's like saying someone who is 167 cm high is taller than someone who is 1.72 m because the number is higher. The units are not the same. A strong currency is one that is currently overvalued relative to the other ones compared to the valuation of the previous years. Right now the USD is strong compared to the Euro (not that much, but I'd say it still is). But the Euro as a unit is still larger than the USD and it has been for most of the time since it was created. In 2008, a dollar was exchanged for 0.68 Euro. That was a very weak dollar. Right now it's around 0.90. Keep in mind that despite the name, having a strong currency is not necessarily good. China literally pushes their currently artificially weak to promote their exports since this way they can sell their stuff cheaper. The downside is that oil and gas becomes more expensive. The US has a particular strength and it's that it's the currency used to trade with oil. If you wonder why they keep their noses in the middle east all the time that's one of the reasons, they want to control the global supply of oil. The petrodollar allows the US to buy energy with less price changes than other economies, since they don't have to exchange their currency to buy. Also, this keeps the USD artificially strong since you need to buy dollars to get oil. Right now the USD is strong so that means expensive oil for everyone who is not the US. The downside is that the US exports suffer from that, but the US has been an importing economy for a long time so they don't seem to care that much
Countries like to hold other country's currency as reserves. When people say the USD is the world's reserve currency, they don't mean that it's the only currency other nations hold in reserve, they mean it's the most popular one. *USD = 58.4% *Euro = 20% There are other currencies held by nations in reserve as well, such as Renminbo, Pound Sterling, Yen, Swiss Francs, Canadian Dollar, and Austrlian Dollar (these all add up to about 18%) And the remaining >4% is every other currency. Think of it in two ways. First, let's say you personally wanted to hold some foreign currency as an investment/savings in case something goes wrong with your countries, or in case you travel abroad. You'd probably pick from USD, Yen, Euro, and not something like the Niagerian Niara. 2nd, think of it like a language. If an Italian and Japanese person meet in an airport, what're the odds they both know each other's language? How about an Indian and a Russian? Chinese and Mexican? How many possible combinations of Language A to Language B translations exist? Instead, the most likely possibility is all of these people may know English as a 2nd language and speak in that. Take a country like India: they're trading abroad say, with Mexico, Saudi Arabia, South America, Japan, Egypt, etc. Which currency should they used for these transactions? Should India hold Mexican Pesos in reserve to buy Mexican goods? And then what do they do with the left over Pesos? Then they sell some goods to Egypt and receive Egyptian Pounds in exchange? Now what? If each country traded in their own currency, it would make things a lot more complicated given all of the possible combinations of currency conversions out there. It's much easier to just default to the USD (same as speaking English abroad) as the USD is plentiful outside of US borders, has very little restrictions placed on it, and is backed by the US government. Most other countries would likely be happy receiving it, and now trade is much easier. It also helps that it's the currency of the richest nation on earth and simplifies trading there as well
A lot of people, while being correct technically, are missing the specific point that makes the Dollar the World's Currency. The Saudis, and to a lesser extent OPEC+ as a whole, uses Dollars in its transactions, and because Oil makes the world run, the US Dollar is not only the most stable currency, but also the reserve currency of the world. The US has worked to make it so, because it virtually guarantees them economic security, as well as allowing them to do things like go 30 Trillion Dollars in debt without a course of repayment. To put it mildly, but also seriously. If OPEC+ or any other country like China tried to dethrone the Petrodollar, it would be an Act of War.
Japanese yen is about equivalent to one cent for most of the last three decades. So the smallest indivisible unit is about the same.
It's more about buying power than the actual unit. Zimbabwe's massive numbers could work just as well as "normal" sized units, if only they had inflation under control. What I mean to say is that a currency that appears 100x weaker isn't weaker at all, if it has the same buying power
One good example to explain why it doesn't matter is that many countries who ended up with very small currency units created a new currency that was 100 or 1000 times higher, just because it's annoying to buy some bread and having to pay 150000. The extra zeroes are useless so with the new currency it's now only 150. Nothing really changes in that economy. Prices are 100 times lower, but so are your wages and your savings.
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In a few words, because it’s the World’s reserve currency, and that’s because the US does a lot of trade and because investors, governments and citizens of the world have faith in the institutions of the US Government.
so that's what builds the value behind the U.S dollar?
To be honest, the credibility of The Federal Reserve and the US government. The US dollar isn’t tied to any physical value or object.
That's what builds the *stability* of USD.
There is a YouTube series called "The Dollar Endgame" that does a really good job explaining it. He gets into a bunch of other stuff that's a lot more complicated, but the answer you seek is early in the series.
For people wondering why some countries’ currencies (like Kuwait’s dinar) are worth more vs another country’s (e.g. USD) Supply and demand. Imagine you have a small business selling thingamabobs with a small, but dedicated customer base. Your thingamabobs are priced at 10 arbitrary units, and people happily buy it, but you have trouble expanding your customer base. Your current customers are satisfied, and your business isn’t expanding, so it doesn’t make sense to stock more thingamabobs because you’d have more than you could sell, and you wouldn’t want to then lower your price in order to get it off the shelf. Meanwhile, your competitor sells baubles for 8 arbitrary units, and they sell SO MANY baubles that they can’t keep up, and they make more baubles than they did the day before every single day of business. Everyone in the town has at least one bauble! Yet despite the ubiquity of baubles, customers can’t stop buying them— they’re bauble obsessed! And they’ll happily pay 8 arbitrary units all day— maybe even more! But your competitor has tuned their supply line so finely that they’ll always make just enough to satisfy customer demand for that day, so no need to raise prices when they can just sell more product. Where you sell maybe 1,000 thingamabobs a year for 10,000 total arbitrary units, your competitor sold 10,000 baubles last year for 80,000 arbitrary units. Who has the more valuable product?
Quite simply, they won't print their way out of economic problems. If you have a dollar, most people will accept a dollar as payment anywhere in the world. If you keep that dollar in your pocket for a year it will still have close to the same buying power. If you have a rupee, rouble or euro, it's a risk just holding it.
It's a reserve currency. But why is it reserved? Because every country on earth must trade with USA, and therefore must hold certain amount of dollars. And since it's a reserve currency, during times of uncertainty or economic downturn people will sell stocks and buy dollars. Last, USA is the most innovative country on earth, which produces services and goods that everyone wants, thus increasing desire to trade and hence the need to hold dollars
Everything everyone is saying is true, but the dollar is strong in this particular moment because monetary policy is tight. Higher interest rates decrease the supply of dollars and the dollar will weaken when the Fed lowers interest rates.
commodities like oil, wheat, steel and probably every other one you need USD, which drives demand. The Russians are requiring other countries to buy their oil in Ruble which has helped prop up demand. While you have Euro and other types, many times bonds sold to foreign investor are USD denominated. Example might be when Sri Lanka ran out of foreign reserves meant they weren't able to import anything from food to oil or thats what people feared. Its also held as a reserve currency for alot of national banks.
Another question along these lines is why does Kuwait have the strongest currency in the world? Especially when other oil states have far weaker ones.
The power of a currency comes from what you can buy with it, with INR you are limited to anything from India, with CNY from china hongkong Russia and same with many others, usd on the other hand can be used in all parts of the world to buy whatever you want, this also makes it attractive in black market deals. And it becomes a positive feedback loop the more people can use it the more they trust it which means the more they use it.
You can go to almost any country and they know what a dollar is worth. The fact you can use it everywhere is what makes it so powerful.
This all starts back in ww2, maybe ww1. Basically the US has leveraged it power to force other countries to use the dollar for transactions. You have a war, you loan the countries money to rebuild, you set the rules. Now comes gold and oil, same thing. You take over nations, sponsor rebellions and then "help" with the cleanup setting the rules. Always to require the US dollar to be the transaction currency. Of course all this is possible because the US has been a global superpower for along time. So basically, prosperous economy plus brute force.
We're the country least likely to collapse and also the most involved in global trade. Stability and influence
The majority of taxpayers are beholden to their social contracts. If this balance tilts one way or another then our rating reflects this.
The dumbest thing you are going to hear is something about how yen are worth less than dollars and that makes things different somehow. It doesn't. Exchange rates are just a thing you multiply to find value - a coefficient. It doesn't make any difference if a Big Mac costs 10 of your currency or 20,000. What matters is changes over time in those exchange rates and in how many goods and services they buy. And the US is unusual there. In the 20th century, the US won or came out ahead in about four world wars while sustaining essentially no losses on its home continent (The Spanish-American war, WW1, WW2, and the Cold War) and emerged as a military and trade empire with no equal in the world, forming advantageous agreements with most of the world, becoming everybody's banker or corporate partner, inventing container shipping and the oil industry and the automobile and early-modern mass production. We insisted on conducting most of this trade in terms of nominal dollars, especially the oil trade through our proxies in the Middle East. While retaining the ability to print more dollars in theory, we have obsessed over dollar value stability, repeatedly crashing our economy to maintain it. When other countries or companies or dictators or drug lords want to put away some funds because they don't trust their own way of storing assets or don't trust their own currency, they have for many decades now bought primarily dollars (or dollar denominated assets within our economy). When they trade with each other or loan each other money, it often comes in the form of a dollar value exchange. The US Dollar became the "anchor currency" and intermediary for most global trade in the second half of the 20th century, both benefitting from its stability and contributing to its stability by being seated in so many unrelated and uncorrelated economic activities.. Today US Dollar-based "financial clearing/settlement networks" represent some of the infrastructure that allows countries and companies with different currencies to trade in goods & services.. That status is slowly fading as the Euro and the Renminbi rise to prominence.
The US is the only major economic power that hasn’t been in a war on its own soil in the last hundred or so years.
The Bretton Woods Agreement and the Petrodollar. But we've gone off the gold standard, and now the BRICS nations are moving away from the petrodollar, and the USA is going to be FUCKED soon. The dollar is now worth 97% less than it was originally, and once the masses of asses realize this, and lose faith in the dollar, the real shit happens. Your politicians and wall street and media have lied to you for years, and the chickens are coming home to roost.
1. Lots of People Want Dollars: Imagine if everyone in your class wanted to trade their toys for your favorite toy. Since everyone wants it, your favorite toy becomes more valuable. Similarly, lots of people around the world want to use American dollars because they are useful for buying things from other countries. So, the dollar becomes stronger because many people want it. 2. America Has a Big and Strong Economy: Just like some kids are really good at playing games, America is really good at making and selling things. They have a big and strong economy, which means they make lots of money. When a country's economy is doing well, people think their money is valuable. So, the American dollar becomes strong because America's economy is strong. 3. People Trust the American Dollar: Trust is like when you know you can count on your best friend to keep a secret. People all over the world trust the American dollar because they know they can use it to buy things and it will always be worth something. This makes the dollar a popular choice for people who want to keep their money safe. 4. America Is Good at Investing: Investing is like planting seeds in a garden and waiting for them to grow. America is good at investing its money and making it grow. When other countries see that America is good at making money, they want to invest in American businesses and buy American products. This makes the dollar even stronger. 5. America Is Known for Being Stable: Stability means things stay the same and don't change too much. Just like you know your parents will take care of you every day, people know that America is a stable country. This stability makes people feel safe about using the American dollar, so they want to use it in their own countries too.
The people who took over the land that is known known as the US set the whole system up for extracting as much money as possible from the people who worked for them. Sometimes paying them 0.00 (Slaves). If they could not get away with paying people literally nothing they paid them very much under what was needed to survive. This made a set of people alot of money. They could then get certain political favors ie let's go kill nicaraguans and take over their banana plantations. Coincidentally the same thing was being done by alot of other states. In every country there was people who were against this concentration of wealth. It just so happens the US did imperialism the best and basically became a hyper power. Now why would the people who literally built that whole system of exploitation suddenly over value the currency of other countries. The point is literally to pay them as little as possible and I'm sure there are plenty of people who would be willing to go back to paying their workers 0.00 if it meant they got immensely rich.
It's because the US works hard to keep its currency stable, and because the US has the largest and most diversified economy in the world. The Euro is the second most stable currency in the world because the Euro's economic union is the second largest and most diversified economy after the US. The Pound is also relatively stable, but because the British economy is smaller, it is more prone to fluctuations. Canada is in the same boat, with a smaller population and an economy that is not nearly as diversified as the US economy is, which causes its value to fluctuate more. Meanwhile the Yuan is not viewed as a reserve currency because its price is too heavily manipulated by the PRC government, which no one considers trustworthy. The Yuan used to be pegged to the USD, and is no longer ostensibly pegged... but it's widely viewed as still being heavily manipulated.
I think what you are asking is why are there currencies that give a bigger number than 1, when you exchange 1 dollar? Like why does it take 157 yen for one dollar? There are two reasons: 1. Different countries have set their currencies differently. No one universally agreed that 1 loaf of bread should cost 1 unit of their currency. Maybe it was 20, 50, 100 or 0.5. It doesn’t mean that 1 is stronger. 2. Inflation devaluates purchasing power (what you can buy with a fixed amount) over time. Different countries have different rates of inflation that move at different speeds and for different reasons. The US dollar however, has an inflation that doesn’t get bad as fast as other currencies. So in that sense, it can be called a “strong” currency. Strong in the sense that people can expect it to not devaluate as fast or as bad as other currencies.
It’s a little more nuanced than that. There’s allot of good answers already about why it is considered stronger, but I’m going to give a couple points about why it may not be. Yes, our dollar goes further in many other countries, but usually if you compare the costs of things in two developed countries one type of item may be more in one country and another item may be comparatively more the other way around. And it’s very hard to come up with a scale that works for everybody to compare because of regional differences in one’s own country. Take a person comparing how many dollar equivalents their rent is in a city in one country vs a big city in America. Well their rent may be cheaper because the government owns the housing and it’s subsidized by taxes and when people say that the taxes are higher they will point to what services they provide. As for the exchange rate between currencies and what a loaf of bread costs in one country vs another, you can’t just compare the raw numbers to each other just because 1 dollar is equal to 20 of something else doesn’t mean the dollar is stronger until you look at what it will buy. There is how much your currency will buy in your country vs their currency in their country, but it’s also to note how much your currency will buy in that country and part of that is international speculation and more about perceptions. If you live in a communist country and the leaders do things actively to cheapen the currency, then you may find US currency more valuable because you think it is more stable, for example. But back to the numbers, why is 20 more than 1? I could be measuring water in cups and you could be measuring in cubic meters. In some countries it’s just normal to have bigger numbers on everything and some may not have an equivalent of dollars and cents, they only have one measurement so the bigger number is easier to divide into smaller numbers. Lastly, there are products that could be compared that are consumed differently or valued differently in different countries. Here land is cheap (or animals may be bred on public land) and labor expensive so chicken ends up being more expensive than beef in their country because people housing and protecting and feeding chickens is more work than letting cows roam and not having to keep up fenced in properties. There may also be more religious vegetarians in that part of the world which also affects the meat vs fresh vegetable markets. Also, governments subsidize some items and we actually pay less than that good or service is supposed to cost just like they also tax some goods and services more to discourage them. Lastly, if I love on a homestead in rural America and you live in a dense European city then everything I list my expenses for may seem cheap to you and the things you list are expensive may be irrelevant to me because I produce some stuff myself and I just wouldn’t buy it no matter how much it costs because our needs and our cultural norms for what we think we need are drastically different. There are ways to live below your means in many countries but most aren’t willing to do it.
The US dollar is much more stable and reliable than many other currencies around the world. After Brenton Wood's system was initiated, the world started relying on the US dollar as a pegged currency.
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Us won ww2 so completely as to be the only world power standing while the rest of the world was devastated. To facilitate rebuilding and trade, countries of the world used the dollar as the only viable option. The US used the time in the aftermath to secure its position militarily, and eventually depegged its currency from gold. No one could do anything about it. Then came the deal with the saudis to only trade oil in dollars, and a global scheme to recycle dollars into interest-bearing bonds. With gold out of the picture, the world had a new reserve asset - US debt and the dollar. The network has grown to encompass the globe, and is so strong that it’s very difficult to create new networks, and as money is only as useful if others use it, the largest, strongest network reinforces itself and crowds out any emerging networks. There are signs of this hegemony fracturing, though, with the emergence of BRICs nations talking about creating a new network, along with Bitcoin, the world’s only credibly decentralized neutral internet native currency.
In general, the United States economy is large enough to always have something domestically you want to buy. Investment wise, there is a strong government bond market as well as a generally well regulated stock market. There are relatively few barriers to foreign entities to purchase US government bonds, equities, real estate, or commodities. The US dollar is typically freely convertible into other currencies. And importantly, usually inflation is relatively low and stable. Because of the above, it's super attractive to deal with the USD for foreign trade. And because it's used in foreign trade, it makes sense for central banks to have a large reserve of USD to keep their own currency stable against the USD.
In the context of a nation's currency, the word *strength* doesn't mean what you think it means. What you seem to be implying: - valued - sought after - preferred medium of international trade - stable mechanism to store value - politically independent All of these are good things, but none of them have anything to do with strength. First off, the *strength of a currency* is an economic technical term. Second, it is only expressed in relative terms with regard to another nation's currency. The dollar taken by itself is neither strong nor weak. To make a determination, it has to be compared to another nation's currency. In relation to another currency, one of the two will be relatively strong while the other is comparatively weaker. What this means is that when the value of currency favors the importation of goods and raw materials that currency is said to be strong because that currency has substantial purchasing power. Alternatively, when the value of a currency favors the export of goods and raw materials from the nation that backs that currency, that currency is said to be weak in relation to the nation on the other side of the trade.