How the US Dollar emerged as the global reserve currency in the post-World War II era

At the heart of this strategy was the Bretton Woods Conference of 1944, which redefined the global monetary order. The 44 countries of the Allied bloc, including America, Canada, Australia and most of Western Europe, participated in the conference with the aim of negotiating a monetary order that would govern relations between the states.

With war-torn Europe in dire need of financial stability and liquidity, the US leveraged its position as the dominant post-war economy to establish the dollar as the central reserve currency. Bretton Woods created a system where global currencies were pegged to the dollar, which in turn was convertible to gold at a fixed rate. This arrangement provided a stable framework for international trade and investment, cementing the dollar’s pre-eminence in the global economy.

The conference was also instrumental in sidelining Britain’s global financial dominance. Once a key hegemon, Britain emerged from the war severely weakened and economically dependent on the US. The British Empire’s economic interests, particularly in the Middle East and Venezuela, were targeted by US planners as critical assets for post-war strategy. As the CFR noted, the United States saw an opportunity to displace Britain as the global hegemon and reshape the international order to serve its national interests.

Under the Bretton Woods system, the dollar’s centrality was reinforced by its role in international transactions and trade. In A Century of War: Anglo-American Oil Politics and the New World Order (1992), William Engdahl noted, “Most international transactions were denominated in dollars,” firmly establishing the currency’s global role.

As the global reserve currency, the dollar provided unparalleled advantages for US policymakers. According to economist Michael Mastanduno, its role as a “lynchpin” enabled the United States to finance external deficits by effectively printing money and lending it abroad. In System Maker and Privilege Taker (2009), Mastanduno argues that this allowed the US to pursue domestic and foreign policy objectives without facing immediate financial constraints.

Dubbed an “exorbitant privilege,” by the French Minister of Finance in the 1960s, the dollar as a reserve currency lowers borrowing costs for the US government and consumers while insulating the economy from currency crises. It also empowers US policymakers to leverage the financial system for sanctions, enhancing geopolitical influence. However, in a 2024 article for the Brookings institution, economist Michael Pettis highlights that this dominance comes with significant costs. To maintain the dollar’s global role, the US must absorb global capital imbalances, often running trade deficits to accommodate surplus savings from other countries. These imbalances can exacerbate US indebtedness and put upward pressure on the dollar’s value, which can hurt American exporters.

International influence

The primacy of the dollar affords the US outsized influence over foreign policy. In Paper Soldiers: How the Weaponization of the Dollar Changed the World Order (2024), journalist Saleha Mohsin argues that from 1944 to today, US Treasury Secretaries, and by extension, the US itself, have transitioned the dollar from “a domestic political obsession to a weapon used abroad.”

From the 1970s to the 1990s, the Treasury Department directed the Federal Reserve to intervene in currency markets by buying or selling dollars to stabilise the currency. Often, trade partners who benefited from a stable dollar assisted in these efforts. However, as global trade grew, these interventions had unintended political and economic consequences, particularly when they impacted exports.

For example, in the 1990s, President Bill Clinton authorised the purchase of Japanese yen and the sale of dollars to promote global financial stability. While this move aimed to support international markets, it also made Japanese imports more expensive, inadvertently boosting American manufacturers. This raised concerns that the US might be contradicting its own commitment to free trade by engaging in practices it often condemned, such as currency manipulation for trade advantage.

Such perceptions of hypocrisy fuelled criticism, including from Robert Rubin, who served as the US Treasury Secretary from 1995 to 1999. Rubin opposed currency market interventions and, in 1995, committed the Clinton administration to a policy of non-intervention, allowing the dollar to strengthen naturally. When questioned about currency policy, Rubin and his successors would often respond, “a strong dollar is in the interest of the United States.”

For the rest of the world, however, this strong dollar policy had significant ramifications. While Washington refrained from directly managing the dollar’s value, the currency’s dominance continued to grow in global debt issuance and economic sanctions. Mohsin writes, “As Washington promised not to intervene in the dollar’s value, it increasingly relied on the dollar to intervene in other countries — meaning that for all the domestic imbalances a strong dollar has caused, the power of the dollar may be felt most acutely outside of America.”

Take for example, the 1956 Suez Crisis when Britain and France decided to invade Egypt in response to Egyptian President Gamal Abdel Nasser’s decision to nationalise the Suez Canal. Eventually, the French and the British were forced to withdraw, a fact that historian Diane Kunz attributes to the financial influence of the United States. The European powers, Kunz argues in The Economic Diplomacy of the Suez Crisis (1991), were not swayed by moral outrage, global opinions or Russia’s threat of aggression, but by the unwillingness of the US to back the rapidly depreciating British pound. She writes that after American President Dwight Eisenhower refused to prop up the pound if Great Britain continued the invasion, “the question became not whether, but when, Britain would bow to American imperatives.”

Decades later, Nixon and his cabinet would unilaterally change the whole global monetary system. A key provision of Bretton Woods was that the dollar would be pegged to gold at USD 35 an ounce. Other central banks could exchange the dollars they held for gold. Eichengreen argues that when Nixon abandoned the gold standard in 1971, only the United States “possessed the necessary political control over financial institutions that would facilitate the capital flows required by a global reserve currency.” In essence, Nixon’s decision established the dollar as a fiat currency, meaning that it was no longer pegged to the price of any other commodity and could not be redeemed for physical commodities like gold and silver. The abandonment of the gold standard is described by Eichengreen as a demonstration of US influence and power across the globe.

As it was in 1971, the dollar remains supreme today. However, since the start of the 21th century, many have argued that its supremacy diminishes day by day.

De-dollarisation

A day after Wall Street crashed in September 2007, delegates of the United Nations met in New York to discuss the wider implications of the financial crisis. In Crashed (2008), historian Adam Tooze documents the events of that day. Tooze states that while American President George Bush attempted to frame the crisis as Washington’s responsibility, other countries were less inclined to hand over the reins. The President of the Philippines accused America of unleashing a “terrible tsunami” of uncertainty that was spreading around the world, “not just here in Manhattan island.” Argentina’s representative said that it was a crisis that emanated in America and that Washington’s response sparked the need to review the “behaviour and policies” of the entire monetary order. “One after another,” Tooze writes, “the speakers at the UN connected the crisis to the question of global governance and ultimately to America’s position as the dominant world power.”

The dollar as the global reserve currency made sense after World War II when America was far and ahead the largest trading country. However, today, both China and Germany export more than the United States. The economies of the BRICS countries are also growing rapidly. Combined with discontent with American foreign policy, the international aspirations of China, and political instability in Washington, the idea of de-dollarization is becoming more and more appealing. Countries are exploring alternatives, from settling trade in other currencies to stockpiling reserves in gold or even experimenting with digital currencies like Bitcoin. For some, this shift is about necessity; for others, it’s a strategic move.

US sanctions have become a major driver of this trend. The US has over 30 active sanctions programmes, targeting nations from Iran to Venezuela. These measures, often unilateral and unsupported by other major powers, have disrupted economies and forced targeted nations to seek alternatives to the dollar. Russia’s experience highlights this shift. After the Kremlin’s invasion of Ukraine in 2022, Western sanctions cut off much of Russia’s access to dollar and euro systems, prompting Moscow to embrace the Chinese yuan and ramp up trade in alternative currencies.

China has also been actively chipping away at the dollar’s dominance for years. Following the 2008 financial crisis, Beijing began laying the groundwork for the yuan’s internationalization, introducing currency swap agreements and establishing its Cross-Border Interbank Payment System (CIPS) to reduce reliance on dollar-based trade. Countries such as Saudi Arabia, Argentina, and Brazil have started using the yuan in trade or expressed interest in doing so, reflecting a slow but steady shift. While the yuan still accounts for only a fraction of global transactions, these moves underscore a desire to build resilience against US sanctions and economic pressure.

The BRICS bloc has also emerged as a significant challenge to the dollar. With the inclusion of new members, the group is positioning itself as a counterweight to Western economic dominance. Together, these nations control key trade routes, such as the Suez Canal, and hold significant natural resources, from fossil fuels to rare earth metals crucial for the global energy transition.

This expanded BRICS coalition signals a new phase in economic statecraft. In the 20th century, blocs like OPEC leveraged oil to influence global markets. Today, BRICS is exploring a more diverse toolkit — one that could disrupt trade not just in oil but across sectors. The inclusion of major exporters and resource-rich nations within BRICS raises the possibility of alternative reserve systems that bypass the dollar entirely.

The global financial system is not abandoning the dollar overnight, but the cracks in its dominance are becoming harder to ignore. Countries seeking to de-dollarize aren’t just reacting to sanctions or instability, they’re also challenging a system that has long favoured Washington at their expense. Whether through currency diversification, bilateral trade agreements, or economic coalitions like BRICS, the era of unquestioned dollar supremacy is facing its strongest challenge yet.

Further Reading  

Globalizing Capital, Barry Eichengreen, Princeton University Press, 2019

The Making of Global Capitalism: The Political Economy of American Empire, Leo Panitich and Sam Gindin, Verso, 2012

A Century of War: Anglo-American Oil Politics and the New World Order, William Engdahl, Pluto Press, 1992

System Maker and Privilege Taker, Michael Mastanduno, Cambridge University Press, 2009

Paper Soldiers: How the Weaponization of the Dollar Changed the World Order, Saleha Mohsin, Portfolio, 2024

The Economic Diplomacy of the Suez Crisis,  Diane Kunz, University of North Carolina Press, 1991

Crashed, Adam Tooze, Viking, 2018