The previous episode of globalization ended with World War I and a domino effect of protectionist measures leading into World War II. After World War II, the Bretton-Woods accord restarted global trade and growth by making the U.S. Dollar the first official universal currency with respect to which all other currencies fixed their exchange rates. Trade-surplus countries were thus incentivized to hold their excess reserves in Dollars and Dollar-denominated assets. The growth of debt, mainly denominated in Dollars, was thus at the heart of globalization.

The Dollar as Reserve Currency

Since the Dollar was still pegged to gold under the Bretton-Woods system, global economic growth, and its prerequisite growth in trade, were constrained by the global supply of gold between 1945 and 1970. Once the Dollar was divorced from gold in 1971, a credit-based system of global trade enabled accelerated growth in trade and economic activity, as Paul Volcker noted, with apparent puzzlement: “People were more willing to hold dollars that weren't backed by gold than they were willing to hold dollars that were backed by gold.” For decades, the mounting volume of world trade was made possible by mounting stockpiles of international reserves. Figure 5.1 shows the total accumulated official reserves in Special Drawing Rights (SDRs) of the International Monetary Fund (IMF). In fact, the bulk of those reserves were held in Dollar-denominated assets. During the 1970s, and again in the current decade, a significant part of this growth in international reserves has been accumulated in the coffers of oil-exporting countries.