Over the past two years we have been witness to extraordinary events around the world, especially with regard to global economics. We have observe the fall of some of the most revered and trusted financial institutions around the world as well as the consolidation of others. Major banks have completely collapsed and incompetency has been exposed throughout the investment community.
Now, there is talk of rearranging the entire structure of global trading practices with the specific intent of lessening the hardship caused by volatility in the US economy and its own practices. It seems the world has had enough of the US dollar as the official world currency and wants to end the special status that such a title conveys.
But how did we get here? How is it that of all the monies in the world, only the US dollar holds the title of world currency?
To understand that, we must first travel back to before the time the US dollar was number one. We must go back before the concept of one global currency even existed. We must travel back to the end of the 19th Century and the beginning of the 20th Century.
Leading into the 20th Century the general practice was to use gold as the main trading instrument between nations. It was thought that by keeping the value of gold consistent among all nations, the balance of trade between them would always remain level and consistent. The idea behind this is quite simple. If a nation exports more than it imports, its trade balance will be positive, the amount of gold would increase, and its currency would become stronger. Similar goods from other countries would become cheaper as a result and would take its place in the world market. It would start importing more than exporting, thus bringing it back in line with the rest of the world.
The major problem with this was that the amount of trade was directly related to, and restricted by, the amount of gold in the world. With gold at a fixed price and a fixed quantity, only so much trade could result. Increases could only occur when more gold was mined and put into circulation.