Authored by Joshua D Glawson, a new revelation in the sphere of global finance has been brought to our attention through the latest quarterly bar chart race produced by Money Metals, showcasing the evolution of global international reserves. The animation captures the dynamic shifts in the makeup of world reserve currencies over time, hinting at a competitive race towards dominance that has seen various currencies vie for the top spot since 1950, projected through to 2024.
Renowned gold analyst at Money Metals, Jan Nieuwenhuijs, provides an insightful guide through this financial journey, delving into the fluctuations and trends of major world currencies. These include gold, the US dollar, the British pound, the Deutsche mark, the French franc, the euro, the Chinese yuan, the Japanese yen, and a collective category termed “other FX”, which encompasses currencies like the Swiss franc.
The starting line for this historical race was drawn in 1950, with gold leading the pack, constituting a staggering 72.41% of all central bank reserves. The British pound sterling and the US dollar held their ground as the second and third most significant reserve currencies, respectively, while a smaller fraction was held in various other foreign exchange currencies.
Fast forward to the mid-20th century, pivotal events unfolded that would reshape the global financial landscape. In 1965, amidst the US government’s decision to remove silver from its currency and its escalating involvement in the Vietnam War, combined with exorbitant spending on social programs termed the “Great Society”, pressure mounted on the US government. The creation of currency in excess of gold reserves led to inflationary pressures, compelling nations such as West Germany, France, and England to exchange their dollars for gold, a substantial portion of which they repatriated.
This chain of events precipitated the collapse of the Bretton Woods gold standard by 1971, by which time the US dollar had surged to encompass roughly 45% of all reserves, overshadowing gold which stood closer to 39%. The definitive moment came on August 15, 1971, when Richard Nixon terminated the convertibility of USD into gold, effectively dismantling the Bretton Woods System and sidelining the gold standard for international transactions – an event now known as The Nixon Shock. This move prompted a reassessment worldwide, with countries contemplating the holding of gold over the USD. By the end of 1972, gold had regained its premier position as a leading reserve currency.
The unraveling of the Bretton Woods Agreement signified a watershed moment, leading most global currencies by March of 1973 to detach their value from the USD, subsequently embracing a free market valuation for gold over the previously fixed rate of USD $42.22.
The subsequent introduction of the “petrodollar” system in 1974, following a US agreement with Saudi Arabia that mandated all oil transactions be conducted in USD, marked another strategic move. Though it didn’t immediately catapult the USD to its former glory, it significantly contributed to its resurgence as a dominant reserve currency over the long term.
By the late 1970s, the International Monetary Fund (IMF) officially declared gold as a commodity rather than a reserve currency, a decision that did not diminish its value but altered its role within the international monetary system. It’s noteworthy that from 1933 to 1975, it was illegal for private American citizens to hold gold for investment purposes or as insurance against USD inflation.
In the years that followed, particularly by 1976, the petrodollar system had ensconced the US dollar as the preeminent reserve currency, a shift Jan Nieuwenhuijs likens to a strategic maneuver against the free-market pricing of gold. The strategic alliances formed, particularly with OPEC countries led by Saudi Arabia, underscored a crucial element of this transition, with oil transactions in USD providing immense support to the dollar’s value.
Despite these shifts, the allure and intrinsic value of gold endured, leading to its resurgence as the world’s leading reserve currency by 1978, a title it retained until the disintegration of the Soviet Union in 1989. Post-Soviet Union, with limited competing liquid currencies, the USD reclaimed its position at the head of the reserve currency pack by 1990.
The introduction and stabilization of the euro around 1999 and its subsequent growth challenged the dominance of gold and the USD, seizing the second spot and relegating gold to third. However, recent times have seen gold reclaim its position, trailing closely behind the USD in terms of global reserve currency standings as of 2024.
With gold prices reaching unparalleled highs and inflation rates climbing globally, coupled with diminishing confidence in the US dollar, there is a palpable shift underway. Many economists and investors speculate that we may be witnessing the dawn of a new era where gold reassumes its long-held position as the foremost reserve currency globally.
This ongoing saga of currency evolution, underscored by the analysis provided by Jan Nieuwenhuijs and reported by Joshua D Glawson, not only highlights the fluid dynamics of global finance but also poses pertinent questions about the future orientation of global monetary reserves. As the bar chart race conclusively shows, changes in the hierarchy of world reserve currencies are not just historical footnotes but an ongoing narrative of economic powerplays, strategic geopolitical alignments, and the eternal quest for financial stability and confidence. As we venture further into this century, the unfolding developments in this arena are poised to have profound implications for global economics, warranting close observation and analysis.
