Is the United States (US) dollar currency backed by gold? The answer is, no more!
So, what is the US dollar based on? Follow this explanation to find out the answer.
Gold Standard
Before World War II, the world's financial system was based on the value of gold. Thus, each country can print their money based on the amount of gold they have.
Everything changed when the war broke out, where the countries involved pledged gold to America for the supply of weapons and war equipment.
After the war ended, the gold standard system could no longer be continued by those countries because their gold was exhausted.
The world needs a new financial system.
Therefore, America as the main player has dominated the new system due to its gold holdings which are two thirds of the world's gold reserves.
Bretton Woods system
The Bretton Woods system is a system in which the gold standard becomes the fixed currency in a foreign exchange.
The purpose is to create a more efficient foreign exchange system, avoid currency devaluation competition and promote international economic development.
This system was introduced on July 1, 1994 in Bretton Woods, New Hampshire with the presence of delegations from 44 countries.
Because it has a lot of gold holdings, the US dollar is chosen to be the currency that will be based on gold and then the US dollar will be based on other currencies.
Through this agreement, two well-known world financial institutions were created, namely the International Monetary Fund (IMF) and the International Bank (now the World Bank) to help the development of the world economy.
The IMF was established to provide loans to countries that are in difficulty and are unable to obtain other financial resources.
The International Bank or the World Bank was established for the purpose of improvement and development for underdeveloped countries.
More USD, Running Out of Gold
The Bretton Woods system used gave the US an advantage to print too many US dollars.
Over time, the US began to experience a deficit when it channeled too much funds for various projects that caused the number of US dollars to increase, but the amount of gold reserves decreased when many countries asked for gold as a means of exchange with US dollars.
After the situation became difficult, the US made actions that could not be challenged and other countries had to comply.
On August 15, 1971, the Bretton Woods agreement was canceled by then US President Richard Nixon.
He made an official announcement that the US dollar was no longer backed by gold and this event was dubbed the "Nixon Shock".
USD Dominates the World
Because the US has the largest holdings in the world, other countries cannot afford to do anything.
The US dollar currency remains used as the exchange standard for the currencies of other countries and is used for transactions and payments globally.
If not based on gold, the US dollar is based on what? Belief.
As long as other countries acquiesce to the dominance of the US dollar, nothing can be done.
Because of that, there is also an alliance between several countries to reduce the dominance of the US dollar such as BRICS.
