Here’s How Reserve Currencies Have Evolved Over 120 Years
Over the last 120 years, the popularity of different reserve currencies have ebbed and flowed, reflecting the shifting fortunes of leading global economies.
For example, in the year 1900, the U.S. dollar and pound sterling made up 0% and 62% of global reserves respectively. But fast forward to 2020, and the pound now represents just 4.7% of global currency reserves, while the U.S. dollar stands at nearly 60%.
Today’s motion graphic from James Eagle looks at the year-over-year change in currency reserves as a portion of total reserves, spread across 120 years.
What is a Reserve Currency?
A reserve currency is a large quantity of currency held in “reserve” by monetary authorities like central banks.
Currencies are often held in reserve in preparation for investments and transactions, among other things. Our vast global trade system, which is approaching $20 trillion in value, means plenty of currencies are always needed in reserve. In fact, an estimated $5 trillion in currency swaps hands every single day.
Here are some reasons that currency reserves are held:
- Exchange rate stability for the domestic currency
- To ensures liquidity in times of crisis
- To diversify central bank portfolios, which can reduce risk and improve credit ratings
- More than 65 countries peg their currencies to the U.S. dollar
- Five U.S. territories and a number of sovereign countries, such as Ecuador and Panama, use it as an official currency of exchange
- Around 90% of all Forex trading involves the U.S. dollar
All things equal, countries benefit economically from greater demand for their respective currencies.
The Rise and Fall of Reserve Currencies
Some economists argue that the demand for currencies in the long run revolves around the economic relevance of a country. In general, the larger and more powerful a nation’s economy is, the greater the network effect, and the more interlinked they are to the global economy. Thus, the greater demand there is to hold their currency in reserve.
The last 120 years of currency reserve data shows some support for this claim. For example, Japan’s economy hit a peak in terms of its relative share of global GDP in the early 1990s, just before the effects of the Lost Decade were felt. Subsequently, their peak as a reserve currency was around the same horizon, at 9.4% in 1990.
America’s Era of Dominance
Due to the economic strength of the United States in the post-WWII era, the dollar is what economists call a vehicle currency.
This means many non-dollar economies still choose to engage in international transactions using the dollar. These smaller and less accepted currencies are often converted to U.S. dollars before proceeding with any business or trade dealings. This is why, although Asian economies tend to have neighboring states as their top trade partners, they still engage in a massive portion of these transactions with the U.S. greenback as the currency of choice.
Here are some facts that further exemplify the strength and power of the U.S. dollar:
Additionally, the dollar is often seen as a haven in times of extreme uncertainty and tumult. Given its status as the world’s reserve currency, it can be perceived as less risky and can withstand economic shock to a greater degree relative to other currencies.
New Challengers to the Dollar
In the not too distant past, the U.S. displaced the UK economically and as the world’s reserve currency. Today, the U.S. economy is showing signs of slowing down, based on GDP growth.
China is on the rise, having already displaced the U.S. as the EU’s top trade partner. With projections for China to overtake the U.S. as the world’s largest economy before 2030 in nominal terms, could a new global reserve currency emerge?
This article was published as a part of Visual Capitalist's Creator Program, which features data-driven visuals from some of our favorite Creators around the world.
Charted: Public Trust in the Federal Reserve
Public trust in the Federal Reserve chair has hit its lowest point in 20 years. Get the details in this infographic.
Charted: Public Trust in the Federal Reserve
Each year, Gallup conducts a survey of American adults on various economic topics, including the country’s central bank, the Federal Reserve.
More specifically, respondents are asked how much confidence they have in the current Fed chairman to do or recommend the right thing for the U.S. economy. We’ve visualized these results from 2001 to 2023 to see how confidence levels have changed over time.
Methodology and Results
The data used in this infographic is also listed in the table below. Percentages reflect the share of respondents that have either a “great deal” or “fair amount” of confidence.
|Year||Fed chair||% Great deal or Fair amount|
Data for 2023 collected April 3-25, with this statement put to respondents: “Please tell me how much confidence you have [in the Fed chair] to recommend the right thing for the economy.”
We can see that trust in the Federal Reserve has fluctuated significantly in recent years.
For example, under Alan Greenspan, trust was initially high due to the relative stability of the economy. The burst of the dotcom bubble—which some attribute to Greenspan’s easy credit policies—resulted in a sharp decline.
On the flip side, public confidence spiked during the COVID-19 pandemic. This was likely due to Jerome Powell’s decisive actions to provide support to the U.S. economy throughout the crisis.
Measures implemented by the Fed include bringing interest rates to near zero, quantitative easing (buying government bonds with newly-printed money), and emergency lending programs to businesses.
Confidence Now on the Decline
After peaking at 58%, those with a “great deal” or “fair amount” of trust in the Fed chair have tumbled to 36%, the lowest number in 20 years.
This is likely due to Powell’s hard stance on fighting post-pandemic inflation, which has involved raising interest rates at an incredible speed. While these rate hikes may be necessary, they also have many adverse effects:
- Negative impact on the stock market
- Increases the burden for those with variable-rate debts
- Makes mortgages and home buying less affordable
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