The Dollar: How American Currency Became the World's Money

In July 1944, representatives of forty-four nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to design the postwar international monetary system. The conference lasted three weeks. What it produced was a framework that made the US dollar the foundation of global finance — a position it has held, in evolved form, ever since.

The Bretton Woods system fixed other currencies to the dollar at set exchange rates and fixed the dollar to gold at thirty-five dollars per ounce. The United States held the vast majority of the world's monetary gold reserves — a consequence of wartime trade imbalances — so the system made mathematical sense. The International Monetary Fund and World Bank, also created at Bretton Woods, provided the institutional infrastructure for managing international payments and financing development.

The system broke down in 1971 when President Nixon suspended dollar convertibility to gold, partly because America's fiscal commitments — the Vietnam War, the Great Society programs — had exceeded the gold reserves backing the dollar. Rather than triggering a global financial crisis, the transition to floating exchange rates with the dollar as the primary reserve currency preserved and in some ways deepened the dollar's central role.

The petrodollar arrangement, negotiated in the mid-1970s with Saudi Arabia, was crucial to preserving dollar dominance after the gold link was severed. Saudi Arabia and other OPEC members agreed to price oil in dollars and to invest their dollar surpluses in US Treasury bonds. Because oil is the most important commodity in the global economy, countries that buy oil need dollars, which sustains global demand for the currency.

The dollar's reserve status gives the United States what French finance minister Valéry Giscard d'Estaing famously called an exorbitant privilege. America can run persistent trade deficits without the currency collapse that would discipline other countries, because foreign governments and investors continuously absorb dollar-denominated assets. American consumers can import more than they export, and foreign governments essentially finance the difference by holding dollar reserves.

The same privilege gives the United States extraordinary leverage over the international financial system. Dollar sanctions — cutting adversaries off from the dollar-denominated financial system — have become one of America's most powerful geopolitical tools. Iran, Russia, North Korea, and other countries have experienced their force. The weaponization of dollar access has prompted some countries to seek alternatives, but the network effects of the existing system are enormous and no alternative has yet achieved sufficient scale to challenge dollar dominance seriously.

The dollar's central role in global finance is both a measure of American power and a mechanism that reproduces it. As long as the world economy runs on dollars, the United States sits at the center of that economy in a way no rival can easily replicate.