The dollar it is the currency that dominates the world economy, specifically, the US dollar. Despite the fiscal problems and the huge public debt that the United States has, of more than 22 trillion dollars, at the beginning of 2019, and whose trend is increasing.
Most of the countries of the world have the dollar as a reference capital to express their debt, that is, the loans they request generate debt bonds that are payable in dollars, with their respective interests at the stipulated time.
In the economy, both in countries and in companies or individuals, the dollar generates confidence, and the transactions carried out for the purchase of oil, for the most part, are made in dollars.
This is a historical fact that has remained since its birth, in mid-1944, that is, at the end of World War II, and that has required the interpretation of economists and the emergence of proposals that seek to turn in favor of recognition. of other currencies, to supplant the power that the dollar has in the world.
- 1 How did the power of the dollar emerge in the world economy?
- 2 Importance of the dollar in the world
- 3 Why does a currency devalue when too many bills are printed?
How did the power of the dollar emerge in the world economy?
The dollar in the world became the main reference currency from the well-known Bretton Woods Agreement which was held in 1944. At that time, the United States Federal Reserve backed the value of the currency with its gold, while a permanent exchange rate system had been established with the currencies of other countries.
However, the North American nation after emerging victorious in two world wars, it strengthened economically and made its currency the essential currency for transactions in the world economy.
Once the economic solidity of the dollar was achieved in the world, the US currency did not require gold support, and it became a fiat currency, that is, Its value is based on the community’s faith or trust in the country’s economy, and consequently in its currency.
This trust is the one that the national and international community has in the wealth of the country that issued the currency, in this case, the United States.
Importance of the dollar in the world
In this way, All the Central Banks of the countries of the world used the dollar as a monetary support and solidity, just as gold was. Despite the fact that the dollar in the world is not an official currency, not even in most Latin American countries, it has become the reference base of their economies.
When you travel to any country on the planet, you must have dollars to exchange for the local currency of the country you visit or buy and pay in dollars for the services you use.
Another necessary reference is that products such as medicines, electronic devices, cosmetics, perfumery and other luxury goods have high costs because the international valuation standard is the dollar.
Other considerations should be highlighted such as:
- 60% of foreign exchange from central bank reserves from European, Latin American countries They are in US dollars.
- Currently there more than 1.67 trillion dollars in circulation around the world.
- More than half of the dollars in circulation are outside the United States.
- Despite the fact that there is no international law that establishes the dollar as the reference currency, everyone relies on this currency for international transactions.
Why does a currency devalue when too many bills are printed?
It is known that the United States prints banknotes without having a gold backing, which means that it would generate hyperinflation and the respective devaluation of the currency.
However, it must be understood that the currency of any country is another product, governed by the same principles of any product, with the law of supply and demand. For example, the demand and use of a currency that is only used by the inhabitants of a country, within their own territory, It is affected when the official bank of that country decides to print more banknotes, since:
- Increase the money supply
- Currency is devalued
- Loses market value
For its part, the demand for the dollar in the world does not stop growing. Thus, all the countries of the world use it, and the United States Federal Reserve you have more prospects of printing paper money without it losing value.
The call dollar hegemony allows the United States to borrow more comfortably than any other country, as all countries use the dollar in the world for their transactions.
Are there other currencies as solid as the dollar in the world?
The dollar is the strongest currency in the world because it is the most stable, which means that when other central banks print currency without control, the Federal Reserve does so on the basis of the global economic movement, that is, in a more reasonable way.
The same goes for other currencies that are also solid, such as the Swiss franc or the British pound, which are also stable currencies.
As stated above, 60% of the currencies of the foreign reserves of the central banks are in US dollars, while 40% correspond to those other hard currencies.
Among these is the euro, the second most widely used currency and which currently represents 20% of the country’s reserves; it is followed by the pound sterling and the Japanese yen; although they are not the only ones, since many other central banks maintain their reserves in Australian dollars or in Swiss francs, currencies that although little known, are recognized for their stability.
Why are the other stablecoins not used with the same regularity as the dollar?
This is because the amount of Swiss francs or British pounds is considerably less on the market. For example, Switzerland has 8.5 million inhabitants, while the United States has 300 million, which represents that Switzerland requires fewer banknotes to be printed and it is more difficult to obtain francs for a transaction.
For its part, The United States is the largest market in the world and thousands of companies on the planet sell their products in that country, so the more the United States trades with the world, the more dollars circulate around the planet.
So it means that the dollar is a currency:
- Abundant and
- Sustained by the world’s largest economy