The US Dollar is the world’s most traded currency, and the world’s primary reserve currency. The United States of America is the world’s largest economy, and the history of the country’s currency is fascinating.
The first interesting point to note is that the term “dollar” is not originally American. This phrase was borrowed from the Spanish, who called their colonial money “dollar”. The dollar, composed of 100 cents, has been used as a payment method since before the United States was ever envisaged.
So where did it all begin?
Colonial America
During the 1690s, paper currency in the United States was born.
It was issued by the Massachusetts Bay Colony to fund military expeditions, and other colonies were quick to take up the practice of issuing paper notes as well. As a result, an early version of paper currency came into use regionally. It was a convenient way of purchasing goods and trading services.
These early dollars, often referred to as “notes”, were backed by a variety of physical, tangible goods and even services – but the value varied from colony to colony.
When the American Revolutionary War began in 1775, the Continental Congress began issuing paper money known as Continental currency. Continental currency depreciated badly during the war due to a lack of solid backing and the rise of counterfeiting. This is the origin of the famous phrase “not worth a continental”.
Interesting fact: Benjamin Franklin took on counterfeiting, using his Philadelphia printing firm to produce colonial notes with nature prints—unique raised patterns cast from actual leaves.
American Independence
America became independent from Great Britain when the Declaration of Independence was signed by Congress on July 4th, 1776.
At this time, continental currency was still depreciating, and by 1780 the bills were worth 1⁄40 of their face value. In May 1781 continentals ceased to circulate, as they had become so worthless. Benjamin Franklin noted that the depreciation of the currency had, in effect, acted as a tax to pay for the war.
Interesting fact: The first $2 notes are Continentals and are nine days older than America. On June 25, 1776, the Continental Congress authorized issuance of the $2 denominations in “bills of credit” for the defense of America.
In 1782, the Bank of North America was created, becoming the first financial institution chartered by the United States, it was funded in part by specie loaned to the United States by France.
Three years later, the Continental Congress of the United States authorized the issuance of a new currency, the US dollar. However, the official establishment of the dollar as the financial tool of the US was not put into place until 1792.
Alexander Hamilton, the Secretary of the Treasury in the fledgling American administration of George Washington, put through the Coinage Act that made the dollar the official national currency of the United States.
As a result, the United States Mint was created by Congress, which was primarily tasked with producing and circulating coinage. From 1792, when the Mint Act was passed, the dollar was defined as 371.25 grains (24.056 g) of silver.
The American Civil War and the Gold Standard
The US Dollar became the official currency of America in 1792. However, it’s important to note that foreign currencies, such as the Spanish dollar, could still be used to purchase goods and services. This all ended with the National Banking Act of 1863, which made the dollar the sole legal currency of the United States.
In order to finance the Civil War, Congress authorized the U.S. Department of the Treasury to issue non-interest-bearing Demand Notes. These notes earn the nickname “greenbacks” because of their colour. It’s interesting to note that all United States currency issued since 1861 remains valid and redeemable at full face value.
Years after the civil war, the Bland-Allison Act was enacted to provide for freer coinage of silver. This act required the government to purchase around $3 million worth of silver bullion each month at market prices and to coin it into silver dollars.
But the discovery of large silver deposits in the Western United States in the late 19th century created another political controversy. Due to the large influx of silver, the value of silver in the nation’s coinage dropped precipitously.
Some wanted to retain the bimetallic standard in order to inflate the dollar, while some advocated for a switch to the gold standard. The gold standard was seen as a safe way to ensure confidence in the currency since paper bank notes could now be exchanged for actual gold.
The gold standard was finally signed into law on March 14, 1900, making gold the only legal basis of the American currency. The dollar’s value was set to the equivalent of 1.5 grams of gold.
Interesting fact: The first $10 notes were Demand Notes (greenbacks), featuring President Abraham Lincoln’s portrait. They were issued by the U.S. Department of the Treasury in 1861.
The End of the Gold Standard
While the gold standard was seen as a stable system of currency, it became clear this would not be the case if debts or war affected the economy. The Federal Reserve Act of 1913 introduced the Federal Reserve, a private bank, as the keeper of America’s economic and monetary policy. It issued new currency called Federal Reserve notes.
The Federal Reserve and its alternative views of currency marked the beginning of the end of the gold standard. Talk of war resulted in massive debt, and as a result, corporations began to make a run on gold to liquidate their bank notes. This triggered an economic chaos, which led to an emergency suspension of the gold standard and the unprecedented closing of the New York Stock Exchange on July 31, 1914.
After a few months of economic turmoil that rocked the world, the New York Stock Exchange reopened. However, the gold standard wouldn’t last much longer.
Eventually the United States remained the only Western nation that still employed the gold standard. This was made possible in large part because the US remained neutral for much of the First World War.
The costs of war wrought havoc on the economies of Europe, but the USA emerged relatively strong. However, the return of peacetime did not bring a long period of economic recovery.
During the Great Depression of the 1930s, the dollar began to quickly deflate in value. To stem the bleeding of the American economy and ensure that the American dollar remained competitive, President Roosevelt suspended the gold standard.
The Gold Reserve Act
To help stabilize the currency, and attract outside investment into the United States, the Gold Reserve Act was introduced in 1934. This pegged the value of the dollar on the price of a troy ounce of gold, which was valued at $35 at the time.
The act made the dollar more attractive for foreign buyers (and made foreign currencies more expensive for those holding dollars). It also led to more conversion of gold into dollars, allowing the U.S. to effectively corner the world gold market.
Years later, under the post-World War II Bretton Woods system, all other currencies were valued in terms of U.S. dollars and were thus indirectly linked to the gold standard.
In the early 1970s, a situation was created where the dollar was worth less than the gold used to back it. Contributing factors included inflation caused by rising prices for imported commodities (especially oil), spending on the Vietnam War (which was not counteracted by cuts in other government expenditures), and a sizable trade deficit.
In 1971, President Richard Nixon unilaterally ordered the cancellation of the direct convertibility of the United States dollar to gold. This act was known as the Nixon Shock.
Interesting fact: In 1918, the Federal Reserve Board began issuing currency in $500, $1,000, $5,000, and $10,000 denominations. They were discontinued due to lack of use in 1969.
The Modern Day Dollar
The current value of the American dollar is not backed by gold or silver. The US dollar is now managed by what is called a fiat system.
Fiat currencies have no physical backing. Their value is based on economic health—a country’s productivity combined with world confidence in the marketplace regarding that country’s economy.
This effectively means that banknotes, which used to be exchangeable for gold, are now backed by confidence and nothing more.
The US bank collapses of 2009-2010 led to a serious decline in world confidence in the dollar, with the European Union wanting the Euro to become the chief means of exchange.
Nevertheless, America remains a country rich in natural resources and with a highly skilled workforce. The US dollar continues to show great resilience and its fall from prominence is far from certain.
Interesting fact: In 2003 the $100 note was redesigned to include additional security features. These features include a 3-D Security Ribbon and color-shifting Bell in the Inkwell. The $100 note also includes a portrait watermark of Benjamin Franklin, visible from both sides of the note when held to light.
Check out some of our other History of Currency blogs:
The History of Currency in Canada
The History of Currency in Germany
The History of Currency in Ireland
