| A History of Dollar Era | | | | SDRs, also called “paper gold”, were first |
| After WWII, an agreement in 1944 created the Bretton | | | | created in 1969 as a tool to enhance the liquidity |
| Woods System. Under this financial system, all other | | | | through replacing gold and silver in international |
| currencies were pegged with US Dollar, which was | | | | transaction. The value of SDRs is determined by a |
| linked to gold at the rate of $35 per ounce. Thus US | | | | basket of currencies include Dollar, Euro, Yen and |
| Dollar became the key currency of the world. At that | | | | Sterling. Although Dollar is still the key currency in this |
| time, Dollar could not be over issued like today, | | | | basket, its weight declined to 44 percent. In this way, |
| because it was backed up by gold, and was thought | | | | other countries may be in a better place to defense |
| to be as good as gold. | | | | their currency reserve when the key country suffers a |
| In 1970, the gold coverage of paper US Dollar dropped | | | | bad time. |
| from 55% to 22%, because the US printed more | | | | Whose Cheese Gets Moved? |
| Dollars to pay back its trade deficits. Foreign countries, | | | | See who said no. “I don't believe that there is a |
| such as Switzerland and France, lost faith in Dollar and | | | | need for a global currency. The dollar is extraordinarily |
| began to trade their Dollar reserve into gold from the | | | | strong right now”—this is Obama’s response |
| US. In order to stabilize the economy, President Nixon | | | | to the proposal. There is no reason for the US to give |
| canceled the Bretton Woods System in 1971. After | | | | up the Dollar’s reserve currency status right now. |
| that, Dollar can no longer be convertible to gold directly. | | | | “Diluting Chinese savings to bail out America’s |
| In the following 30 years, after the collapse of fixed | | | | failing banks and bankrupt households, though highly |
| exchange rate under Bretton Woods System, most | | | | beneficial to the US national interest in the short term, |
| major countries in the world adopted floating exchange | | | | will destroy the dollar’s global status.”(Andy Xie, |
| rates. But most international transactions are still | | | | Financial Times May 4 2009) It is true, but only true in a |
| dominated in Dollars; this maintains US Dollar as the De | | | | long run. |
| Facto world currency. The difference is that the | | | | It took over 10 years for Dollar overtaking Sterling as |
| circulation of Dollar is no longer restricted by the gold | | | | the world’s reserve currency after the US |
| reserve. Comparing the price of gold at about 910 | | | | surpassed the UK in economy. It also took 15 years |
| Dollars per ounce today, you can get a rough picture | | | | for Euro to be adopted after Euro Currency Unit first |
| of it. | | | | came to exist. It may take a long time for countries to |
| Post Dollar Era | | | | recognize the SDRs. Before that, the SDRs should be |
| As worried about Fed printing loads of money to | | | | further improved and perfected by IMF. However, |
| respond the crisis, which may hurt China’s Dollar | | | | don’t overlook that every major issue must get |
| reserve, China realizes it can not rely too much on | | | | 85% votes in IMF, where the US owns 17% |
| Dollar in the future. So China suggested substituting US | | | | alone—enough a veto over every proposal. So, |
| Dollar with IMF’s Special Drawing Rights (SDRs) as | | | | there is a still a long way to go. Even Governor Zhou |
| the world’s single reserve currency in the future. | | | | Xiao chuan said, “It is a long term issue. |