When the founders of the United States issued the dollar in 1792, it is easy to imagine that they did not expect it to be deliberately devalued.
But that is exactly what happened in 1834, when the amount of gold backing a single unit of the currency was reduced to 1.5 grams from 1.6 grams.
The pricing of gold-backed currencies changes more naturally over time. For the dollar, this came when the US overcame several financial crises in its history, either side of the Civil War and into the Great Depression in 1929, when an ounce of gold cost $20.67.
And from the depression to the end of World War II, President Franklin Roosevelt took many measures to protect the dollar’s exchange rate.
Donald Trump, the former president running again for the White House, has brought the issue of dollar valuation into the campaign, hitting out at what he sees as an over-priced currency which is damaging US competitiveness.
There are global implications for any attempt to weaken the relative value of the world’s reserve currency, not least via its role in pricing commodities including oil. Al Majalla looks at the issue for important insight into what could be a theme in the campaign and a major part of international geopolitics afterwards, starting with how the dollar became the world’s lynchpin means of exchange.
The gold standard of Bretton Woods
As World War II was ending, major central banks held the Bretton Woods Conference in New Hampshire. Attended by representatives from 44 countries in 1944, it produced a series of important political and economic developments
They agreed fixed exchange rates, pegging the dollar to gold at a price of $35 an ounce, with other currencies rates of exchange set against the US’s unit of money.
But the move proved to be a constraint on the US Treasury as the wider global economic conditions changed, and over time the system, designed for stability, came under pressure.
The Bretton Woods system ended in 1971. President Richard Nixon liberalised the dollar’s exchange rate and abolished the gold standard, to let the dollar float freely on the market to relieve pressure on the US Treasury caused by the peg to gold.
But the dollar remained the main currency used in international trade. Oil transactions continued to be priced in dollars. It is estimated that around 40% of global trade transactions are conducted in dollars, while the US contribution to international trade is only about 10% of the total.
Rising inflation was perhaps one of the main factors that led to the collapse of Bretton Woods. The increased tension in southeast Asia from 1958 to 1971 – when the US became embroiled in the Vietnam War in an attempt to stop the spread of communism – was a major part of the picture.
One could argue that one of the main factors that led to the collapse of the Bretton Woods system was the policies that caused inflation rates to rise. The period from 1958 to 1971 included increased tensions in Southeast Asia, with the United States becoming embroiled in the Vietnam War in an attempt to prevent the communists in North Vietnam from taking over South Vietnam.
Modern day dollar rivals
Currently, there are currencies competing with the dollar, also used in international trade transactions, most notably the euro and the China’s renminbi.
Naturally, the use of currencies depends on the role that a country plays in international trade. China, for example, has expanded its export capabilities since the 1980s, which has strengthened its ability to agree with its trading partners to settle its imports in Chinese currency.
However, many countries only use the dollar to settle international trade accounts, especially oil-exporting countries that receive payment for their oil exports in dollars. The same is true for the US, Canada, and many Latin American countries.
