routes, industrial production and financial markets across five continents. The Bank of England operated with credibility, and London became the global center of banking and commerce. Sterling was the anchor of the classical gold standard, which ensured exchange rate stability. However, two world wars, economic stagnation and imperial decline undermined Britain’ s fiscal capacity and the pound’ s credibility. The transition from sterling to the dollar was slow but inevitable, completed in the aftermath of World War II.
The US Dollar( circa 1945 – present)
The dollar’ s rise began during World War I when the United States became a major lender to Europe. After World War II, the 1944 Bretton Woods agreement established the dollar as the global reserve currency, pegging it to gold while other currencies were pegged to the dollar. This gave the US extraordinary influence in global finance and established the Federal Reserve as the de facto central bank of the world. Although the United States abandoned gold convertibility in 1971, the dollar’ s dominance persisted due to the depth of US capital markets, the liquidity of US Treasury securities and the sheer size of the American economy. Petrodollar arrangements with oil-producing countries further reinforced dollar centrality by pricing crude oil exclusively in US dollars.
Other Currencies
The euro, introduced in 1999, was designed in part to rival the dollar. It quickly became the second most held reserve currency, peaking at nearly 25 % of global reserves in the early 2000s. However, the eurozone debt crisis, lack of fiscal integration and divergent member economies limited its further ascent. The Japanese yen and British pound are widely held but restricted by the relative economic size and institutional limits of their issuers. The Chinese renminbi, despite the economic scale of China, faces major hurdles such as capital controls, limited transparency and
Dutch guilder, dated 1763.
geopolitical mistrust that constrain its rise to reserve status.
The Triffin Dilemma
A unique paradox faces the issuer of the global reserve currency: it must supply enough liquidity to the world, typically by running current account deficits, yet those very deficits undermine confidence in the long-term value of the currency. This is the Triffin dilemma, named after economist Robert Triffin, who first articulated it in the 1960s.
In the US case, satisfying global demand for dollars means importing more than it exports, thus running persistent trade deficits. While this provides the world with the liquidity it needs to transact, it tends to increase external debt. Over time, the accumulation of liabilities can prompt questions about fiscal sustainability, inflationary risk and the political will to honor obligations. The contradiction is fundamental: global monetary stability depends on a national policy path that may become politically or economically untenable.
The dilemma deepens when global shocks occur. In every major crisis— from the 1997 Asian financial crisis to the 2008 global financial crisis and the Covid-19 pandemic— demand for dollar liquidity surges. The Federal Reserve often responds with swap lines and emergency lending to other central banks, reinforcing
the dollar’ s role but also deepening dependency upon it.
Issuing the global reserve currency confers substantial advantages to the issuing nation, most notably through financial, monetary and geopolitical channels. First, because global institutions— including foreign central banks and sovereign wealth funds— demand dollar-denominated assets such as US Treasury securities, this steady appetite lowers the yield the United States must offer to attract buyers. As a result, the federal government can finance budget deficits at lower interest rates than other countries with comparable debt levels. Second, the United States enjoys“ monetary sovereignty”: it can issue debt in its own currency, thereby avoiding the exchange-rate and rollover risks that burden countries reliant on external( foreign currency-denominated) borrowing. That further reduces the likelihood of currency crises or capital flight.
The dollar’ s dominance also grants the United States considerable geopolitical leverage. Because most international payments flow through systems like the Society for Worldwide Interbank Financial Telecommunication( SWIFT) and rely on dollar-clearing infrastructure, the United States can enforce financial sanctions with global reach, compelling foreign banks and governments to comply with its regulatory framework. Fourth, strong foreign demand for dollars allows the United States to sustain persistent current account deficits without triggering immediate balance-of-payments crises— a luxury not afforded to most economies. Finally, the country benefits from a form of seigniorage: it earns what economists call“ exorbitant privilege” by issuing a currency that others hold as reserves. This allows the United States to effectively import real goods and services in exchange for paper liabilities, generating economic rent from its unique monetary position
While the benefits of issuing the global reserve currency are considerable, they are accompanied by significant long-term and structural disadvantages that can
14 FINANCIAL HISTORY | Summer 2025 | www. MoAF. org