Why is the USD the global currency...

[Gesundheit]

...instead of gold?

And why can't it be replaced? What makes it so dominant?

Any resources to understand how this all came to being and how it works?

[LaucherJunge]

Just look at the pyramid on the dollar bill and you have your answer

[commie]

3 hours ago, Gesundheit said:

...instead of gold?

And why can't it be replaced? What makes it so dominant?

Any resources to understand how this all came to being and how it works?

That is a much harder question than it might seem.

Putting aside the deafening noise which afflicts public discussion of such issues, it would be misleading to say that gold was the global currency before the USD. If you want to understand the history of the USD system, you will first need to have a basic grasp of what came before and I'm not sure that you can find resources for that online. Hopefully there's something out there but back in the day I had to fetch pretty obscure books in more than one library. Just in case: I am of course not talking about the circa 1970 Bretton Woods crisis (while interesting, it's nowhere as important as WWI).

There are online resources for the way the current system works but that's quite technical and I don't know if someone has produced a good introduction that's not deceptive.

So my advice is to start by elaborating (or changing entirely) your question. Otherwise you could easily fall down a rabbit hole you had no need to approach.

 

The middle part is much easier to answer... in a nutshell: the USA won WWII and the only alliance which has emerged to challenge it so far was weak and crumbled decades ago. Other polities have long learned to work within the US system and replacing US hegemony would therefore at a minimum require the other big players to change their ways. Change is generally difficult and costly but much more so when it would require agreements between parties which are jealous of each other. The most likely reason for the USD will lose its current role is that the US government might sabotage it beyond repair.

Edited July 11, 2020 by commie

[JosephKnecht]

14 hours ago, commie said:

the USA won WWII and the only alliance which has emerged to challenge it so far was weak and crumbled decades ago. Other polities have long learned to work within the US system and replacing US hegemony would therefore at a minimum require the other big players to change their ways. Change is generally difficult and costly but much more so when it would require agreements between parties which are jealous of each other. The most likely reason for the USD will lose its current role is that the US government might sabotage it beyond repair.

This is a good summary. 

Until recently, oil was the major energy source that moved the world. You must use energy to move things.

All the world's oil was being bought for US dollars, which made the US currency a neccessary reserve to be used by central banks around the world. This helped make the dollar a global currency.

But the tides are now slowly changing, so expect the rise and fall of currencies in the coming 10 years.

 

[commie]

2 hours ago, JosephKnecht said:

Until recently, oil was the major energy source that moved the world. You must use energy to move things.

All the world's oil was being bought for US dollars, which made the US currency a neccessary reserve to be used by central banks around the world. This helped make the dollar a global currency.

Oil still is the key energy source. But it doesn't matter in which currency it's priced. This popular theory doesn't make sense.

You can buy oil in many currencies now that most currencies can be freely exchanged for one another and you can easily hedge against currency risk anyway. Governments which worry about oil imports worry about logistics and the price of oil which is much more volatile than the dollar. You can of course hedge against changes in the price of oil benchmarks but the benchmark isn't what you'd end up importing. Even direct contracts with suppliers are routinely broken (regardless of price). The best solution is simply to store oil or indeed products.

There are sensible reasons why central banks hold dollar reserves but they naturally are harder to explain to the general public.

Edited July 12, 2020 by commie

[JosephKnecht]

1 hour ago, commie said:

Oil still is the key energy source. But it doesn't matter in which currency it's priced. This popular theory doesn't make sense.

We are transitioning to a more green energy economy. The reliance on oil as a source of energy will continue to decrease in the future.

1 hour ago, commie said:

There are sensible reasons why central banks hold dollar reserves but they naturally are harder to explain to the general public.

America used to be the biggest exporter of goods in the world. Since it exported a lot, it required other countries to hold dollar reserves with which they could buy the American exports. Initially, the US dollar was pegged to gold but later removed the peg. 

These days, the US has immense trade deficits to the rest of the world, but it kept its reserve currency status. My guess is that this won't remain the case for very long. 

@commie What a the sensible reasons? I am interested in learning more. 

[commie]

3 hours ago, JosephKnecht said:

America used to be the biggest exporter of goods in the world. Since it exported a lot, it required other countries to hold dollar reserves with which they could buy the American exports.

That makes more sense than the oil thing, but still doesn't make sense. How would that have worked?

3 hours ago, JosephKnecht said:

What a the sensible reasons? I am interested in learning more. 

1) dollar debts and floating rates

2) problems with other currencies

3) share of USD (and USD-pegged currencies) liabilities of the parties involved global trade and FDI

4) politics

In each case, the relative importance of these 4 is different (and in rare cases, the weight of the fourth reason could be negative). Additionally, in exceptional but important cases, very large dollar reserves can be used to support the dollar.

Note that the first reason implies there's a sort of inertia to this matter as long as the dollar remains acceptable to both international debtors and creditors. And if anything, the US trade deficit is actually helpful in that regard.

[JosephKnecht]

36 minutes ago, commie said:

That makes more sense than the oil thing, but still doesn't make sense. How would that have worked?

4 hours ago, JosephKnecht said:

It is a gross simplification of trade. When America was an exporter of goods, other countries needed dollars to buy their goods. So foreign countries bought the dollar in hopes to buy American goods. These days, America only sells debt and very few goods. 

Yes. Most of the debt issued globally is denominated in US dollar, and the dollar is perceived to be stronger than other currencies. 

But I think America has been abusing their power of global currency for way too long. All abuse of power eventually terminates with loss of power. 

Thanks for the information. 

[commie]

7 minutes ago, JosephKnecht said:

When America was an exporter of goods, other countries needed dollars to buy their goods. So foreign countries bought the dollar in hopes to buy American goods.

That doesn't explain the point of holding dollar reserves, and ignores the diverging interests of the reserve holders and importers. Assuming you need to buy dollars somehow, why buy ahead? In my 4-point summary above, I assumed countries want reserves and gave reasons why they'd want to hold dollars as opposed to something else. But you are apparently trying to explain reserves...

More importantly, your account only covers half of the equation. This isn't an issue today but back in the day, how come there were enough dollars overseas in the first place? Also keep in mind that dollars weren't the only thing US exporters would have accepted as payment. The sticky issue requiring explanation is how and why deficits of the trading partners of the US were financed. And for one thing, making dollars available to the importers ensured that exporters would end up with fat dollar balances instead of foreign assets...

[DivineSoda]

On 7/11/2020 at 0:52 PM, LaucherJunge said:

Just look at the pyramid on the dollar bill and you have your answer

Ha, best answer you're going to get here. 

It won't be for long however, as we're gearing up for a new global standard (whatever it'll be called). This is why we have countries like India testing the removal of certain paper notes. And now in the U.S. during coronavirus, they say paper money is dirty, so card only. And at the same time, they're running out of small coins. So this is all to prepare us for a purely digital currency. 

But the dollar as we know it is done. It's a house of cards that will crumble under the weight of it's own debt (@ 26 trillion now).

[JosephKnecht]

21 hours ago, commie said:

The sticky issue requiring explanation is how and why deficits of the trading partners of the US were financed. And for one thing, making dollars available to the importers ensured that exporters would end up with fat dollar balances instead of foreign assets...

Here is a summary of the world economy for a five-year-old to understand. If you remove the economic jargon, its pretty simple.

China makes things and ships them the states.

The states buy things from China, thus American gets the goods and the Chinese get the dollars.

Chinese get the dollars, and they send them to the NY Stock exchange to invest. 

Americans have the goods and now they also have the money.

China makes more goods, America prints more money.

The cycle repeats. Until it doesn't.

2 hours ago, DivineSoda said:

But the dollar as we know it is done. It's a house of cards that will crumble under the weight of it's own debt (@ 26 trillion now).

I agree. But I will probably take a few years for everything to play out. 

[commie]

4 hours ago, JosephKnecht said:

Here is a summary of the world economy for a five-year-old to understand. If you remove the economic jargon, its pretty simple.

It's only simple if you're lying... to yourself or to others.

Your explanation is not only simplistic enough to be misleading about the actual global economy, it also happens to be wrong about the most basic facts regarding money in such a way that what you describe could not possibly work.

Edited July 13, 2020 by commie

[JosephKnecht]

17 hours ago, commie said:

It's only simple if you're lying... to yourself or to others.

No, I am only lying to five years olds. The explanation was for them. 

The ones who are lying are economists. They obfuscate language to make their knowledge appear more sophisticated than it is.