What exactly is the US dollar and what is its history? The story of the US dollar can be traced back to the nation’s early days when the Founding Fathers understood how a currency can be manipulated for the government’s gain. But their wisdom has gone unheeded.
What is the Dollar?
The United States dollar – equal to 100 cents – is the nation’s official currency. It is represented by the $ symbol. Also known as the greenback, the dollar is the most used currency in the world. Many other nations use it, either officially or unofficially.
A Currency is Born
The US dollar was born with the Coinage Act of 1792, which said a dollar of currency would be equal to as many as 416 grains of silver. A $10 note, also known as an eagle, would be valued by as many as 270 grains of gold. This meant that the purchasing power (value) of the dollar would be equal to the value of gold and silver.
In 1861, the first greenbacks were issued as demand notes – promissory notes payable on demand when a lender demands repayment at any time – to cover the cost of the Civil War. A year later, legal tender identified as United States Notes were issued. Nearly a decade later, a centralized system for printing the currency was established.
Soon after the Federal Reserve (the Fed) was created in 1913, the dollar’s future would drastically change – for better and worse.
The good news for the dollar was that, following the Second World War, it became the dominant currency on the world stage. The bad news, according to critics of fiat money – currency backed by nothing – is that paper currency produced a trap, mainly the eradication of sound money.
Despite being a safe-haven currency in financial markets, the US dollar has lost much of its value since getting off gold. Since the birth of the Fed, the dollar has lost 96% of its value – a dollar from today would have been worth less than four cents a century ago.
As Good as Gold
For a great portion of the nation’s history, the US economy relied on a gold standard. This is when a currency is fixed in gold or silver and can be traded at any time for these metals.
In 1933, President Franklin Roosevelt signed an executive order that banned the ownership of gold coins, certificates, and bullion. Citizens were required to sell their gold to the central bank. A year later, Congress approved the Gold Reserve Act that not only outlawed private ownership of gold, but it also let President Roosevelt set the price of a troy ounce of gold to $35. This lowered the dollar’s value.
In 1971, President Richard Nixon ordered the Fed to cease honoring the greenback’s value in gold. Four years later, the White House announced that the US dollar would be taken off the gold standard. Officially, the US terminated all gold sales and purchases and ended conversion of foreign-held dollars into gold.
The value of the dollar is now determined using supply and demand compared to other currencies in the foreign exchange market.
Kick a Buck
Will the US dollar reign supreme in international markets forever? All the trends suggest that governments and central banks are moving away from the dollar serving as the global reserve currency. At the same time, investors have been pouring into the dollar to flee from the great volatility happening worldwide. In the future, it might be the yuan, or it may be a cryptocurrency as the next dominant form of money.
But for now, the dollar is king.