The Reserve Currency?

Years ago, I read the book Paper Money by Adam Smith (the author, a professional Wall Street gossip columnist, didn't want to use his real name, or the people who spilled Wall Street beans would stop talking to him, so he took the pen name Adam Smith).

Smith tried to explain that, at Bretton-Woods in 1944, the US dollar was declared the world's Key Currency. 

The correct definitions are that a 'reserve currency' is one of the currencies used in international trade, and so must be kept in reserve by international banks.

Before WWII, most of the world were colonies of the European imperial powers. International trade between British colonies and Britain were in £ sterling, so the £ was a reserve currency, and so were the ₣ and a few more currencies of the major European imperial powers. After WWI, the US$ became a reserve currency, and, a few years after WWII, when Japan had rebuilt and re-industrialised, the ¥ became a reserve currency. Today, the ₣ is no longer a currency, so it is off the list, which now consists of the "U.S. dollar, Euro, Chinese renminbi, Japanese yen, Pounds sterling, Australian dollar, Canadian dollar, and Swiss francs," according to the International Monetary Fund. (The renminbi is a very recent addition to the list, since 20 years ago, the PRC had a tiny economy and was not much of a monetary power.) Some of these currencies can be used in SWIFT exchanges (I know the US$, the £, the €, an the renminbi can all be used, and I think there are a few others.)

So yes, the US$ is a reserve currency, but it is one of at least eight reserve currencies.

After WWII, the French ₣ had collapsed, and the British £ was weak. The £ had always been worth at least $5, but had dropped to $4.75 and the UK were panicking over that tiny drop (the first of many). The US had banned ownership of gold by US citizens and permanent residents during the Great Depression, but, to ensure that the US$ could be used in international transactions, any foreigner living outside the US could buy one ounce of gold for $35. The British and French had borrowed huge amounts of those US dollars during the war to buy matériel, and owed the US, plus Germany owed war reparations, so most of the world's gold ended up in Fort Knox, where it stayed, so having a US$ was a good as gold, and your gold backing your dollars was safe in Fort Knox.

So, in 1944, with no one having any trust in any other currency, at Bretton-Woods, the US$ was declared the 'Key Currency,' the main currency for all international trade (this is not mentioned in Wikipedia, but it was emphasised by Adam Smith in Paper Money). All nations other than the US were ordered to price their currency in US dollars, which was worth 1/35 ounce of gold, making all currencies priced in gold, then believed to be the only real measure of the value of a currency.

The US spent lots and lots of US$, first on rebuilding Europe, then on buying oil. During WWII, the US was the main producer of oil in the world, so the Allies had plenty of petrol for their planes and ships and tanks, while the Axis was very short of oil, and had a hard time keeping their planes and ships and tanks running. But after WWII, most Americans were able to buy cars, and the US demand for oil soon exceeded the domestic supply in the US, so the US$s flowed out, and other countries began to get nervous and used their US$s to buy the gold in Fort Knox, until the gold was running out, so, on 15 August 1971, President Nixon announced that the US would no longer redeem a US$ for gold, a US$ was just a US$. The value of the US$ in terms of gold fell slowly at first, but then faster and faster, then settled a bit, and then fell rather slowly until about a year ago, when the US$ began to fall quite rapidly against gold.

Judge Napolitano starts each of his podcasts saying, 'Buy gold!', but there's a problem: a lot of the gold for sale ain't what it's cracked up to be. They'll say 'It's 24 carat,' when it's really 12 carat, so you paid twice as much as you should have paid. To be safe, one must pay to have the gold assayed, and then, when one wants to sell, the buyer will insist you pay to have an assay prove your gold is what you say it is (as the small guy/gal in the transaction, you have to pay all the expenses of the transaction, the big guy/gal don't pay). And after you buy the gold, you have to think of Silas Marner, who earned lots of gold weaving and had it all stolen. So where will you put it? In the bank? The government can seize it anytime they want. At home? A thief could steal it. There is no good place to keep that gold where you can't be robbed or cheated (not to mention taxed).

So the US$ ain't a good place to put your money, gold has lots of problems, and the Chinese 元 looks like the safest place to keep your money, but the Chinese don't make it easy for foreign barbarians to buy their  元.