Reserve currency Regime Changes: going from the Silver Standard to the Gold Standard to Fiat currency
A reserve currency is simply a currency that most of the world trusts, and is happy to receive it in return for goods, and is happy to store surplus wealth reserves in that coin.
The world's first reserve currency was the Spanish Silver Dollar (also known as "pieces of eight" as they were worth 8 Spanish reales).
People trusted it because it had been standardised by Ferdinand and Isabella in 1497 to have 25.563 g of silver. The two monarchs had united Aragon and Castille with their marriage, and then swept south seizing territory on the Spanish peninsula that had been held by the Morrocan caliphate for 700 years.
Not content with that, they paid for expeditions to the new world, seizing territory from the Aztces, Maya and Inca. They were looking for gold, but they found silver, lots of it.
The Spanish Silver Dollar was accepted throughout the Americas, even in non-Spanish territory, and was increasingly accepted in the Middle East and Asia in return for goods.
The silver Dutch Guilder started to challenge it in the 17th and 18th centuries, especially in Europe when the Netherlands became the richest country.
So from the 16th to the 18th centuries, most of world trade was conducted in one of two silver-standard coins: the Spanish Silver Dollar and the Dutch Silver Guilder.
Meanwhile Britain switched to the gold standard by accident. In 1717, Sir Isaac Newton, who was boss of the Royal Mint, set the exchange rate of silver to gold too low (he got his calculations wrong!), which caused silver coins to go out of circulation.
Britain's economy developed rapidly in the 18th century, overtaking the Netherlands as Europe's biggest economy by 1760. But the reserve currencies didn't switch from Spanish dollars and Dutch Guilders: there is a lot of inertia in trading systems. If something is working, and the standard of silver in the coins is regular and trusted, why change anything?
It was Napoleon who ended the silver-standard system by invading Spain and the Netherlands. His aim was to stop them trading with Britain, but their economies collapsed as a result of the invasion, along with trust in their coins.
From then on the gold-backed British pound was the global reserve currency. Britain then invented the industrial revolution and expanded it's empire. By the mid 19th century, 60% of world trade was conducted in pounds.
But by the end of the 19th century, the American economy was bigger than the British one. Again, the reserve currency didn't change because inertia prevailed.
Things didn't change till after WW2. As a "reward" for fighting and winning two world wars, Britain bankrupted itself. It didn't have enough gold to back a reserve currency.
The Americans were eager to take over, and in 1944, the Breton woods agreement came into being, where the US dollar was backed with gold, and other currencies fluctuated against it within agreed bands.
But in August 1971, the Americans abandoned Breton-woods and the gold standard. They were worried about running out of gold thanks to years of overspending.
In fiat systems, the only thing backing a currency is the strength and trust of the country issuing it. How long will the fiat dollar last as reserve currency?
Back in the 18th century, the Spanish had lost ground economically to Britain and the Netherlands, but people around the world still used the Spanish Silver Dollar because it had a standard amount of silver in it, and there were plenty of coins in circulation. It only came to grief when Spain got invaded and couldn't issue more coins.
There are plenty of dollars in circulation, which makes it useful for trade. But it has no intrinsic value. So as soon as something comes along that people trust more they'll switch. Could be bitcoin. Could be the currency of a trusted country with low debt, like Australian dollars. Could even be silver again, as there is plenty in circulation. (Not gold because gold is too scarce to facilitate trade).