Reserve Currency

A reserve currency is a significant quantity held by the government and institutions as means of international payment to support the value of national currencies. Held for investments, transactions, domestic exchange rates, and international debt obligations, a large percentage of commodities, such as gold and oil, are priced in the reserve currency, causing other countries to hold this currency to pay for these goods. The U.S. dollar replaced the British pound sterling as the world's premier reserve currency circa 1945.

Benefits To the Country Holding the Reserve Currency
  • International payments in the reserve currency must flow through their systems
    • They can easily sanction or cut off foreign countries from transacting
    • They can  monitor all transactions between other countries
  • The country can consume more than it produces and finance the deficit by printing more currency

Most Prescient Example:  See US Petrodollar System