Undated
Pernicious influence: The world reserve currency – root of all evil?
Dollar was as good as gold, just more liquid. Every country chose dollar treasury bills over holding gold, as holding T-bills paid interest. Gold didn’t.
The US started building its Military Industrial Complex and took on adventures like the Korean and Vietnam War, running huge fiscal and trade deficits, putting pressure on dollar’s fixed peg to gold. In 1971, Nixon was forced to close the gold window.
Dollar was no longer as good as gold, but it had already become a widely used reserve currency and the most liquid trading asset.
Central banks of other countries were left holding the dollar-denominated treasury bills. They couldn’t simply sell them and buy gold because there just wasn’t enough gold in the world to buy with those T-bills. Or in other words, those T-bills weren’t worth what the exchange rate was telling them.
Since 1973, the US Fed got a blank cheque from the foreign central banks to expand its money supply, via reserves and commercial lending. Gold was no longer the bottleneck. Currencies were floated freely against each other.