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History of the United States dollar

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U.S. Federal Reserve notes in the mid-1990s

The history of the United States dollar covers more than 200 years.


Early history

The history of the dollar in North America pre-dates US independence. Even before the Declaration of Independence, the Continental Congress had authorized the issuance of dollar denominated coins and currency, since the term 'dollar' was in common usage referring to Spanish colonial eight-real coin or Spanish dollar. Though several monetary systems were proposed for the early republic, the dollar was approved by Congress in a largely symbolic resolution on August 8, 1786. After passage of the Constitution was secured, the government turned its attention to monetary issues again in the early 1790s under the leadership of Alexander Hamilton, the secretary of the treasury at the time. Congress acted on Hamilton's recommendations in the Coinage Act of 1792, which established the dollar as the basic unit of account for the United States. The word "dollar" is derived from Low Saxon "daler", an abbreviation of "Joachimsdaler" – (coin) from Joachimsthal (St. Joachim's Valley, now Jáchymov, Bohemia, then part of the Holy Roman Empire, now part of the Czech Republic; for further history of the name, see dollar.) – so called because it was minted from 1519 onwards using silver extracted from a mine which had opened in 1516 near Joachimstal, a town in the Ore Mountains of northwestern Bohemia.

Because gold and silver in the open marketplace vary independently, the production of coins of full intrinsic worth under any ratio will nearly always result in the melting of either all silver coins or all gold coins. In the early 1800s, gold rose in relation to silver, resulting in the removal from commerce of nearly all gold coins, and their subsequent melting. Therefore, in 1834, the 15:1 ratio of silver to gold was changed to a 16:1 ratio by reducing the weight of the nation's gold coinage. This created a new U.S. dollar that was backed by 1.50 g (23.22 grains) of gold. However, the previous dollar had been represented by 1.60 g (24.75 grains) of gold. The result of this revaluation, which was the first-ever devaluation of the U.S. dollar, was that the value in gold of the dollar was reduced by 6%. Moreover, for a time, both gold and silver coins were useful in commerce.

In 1853, the weights of US silver coins (except, interestingly, the dollar itself, which was rarely used) were reduced. This had the effect of placing the nation effectively (although not officially) on the gold standard. The retained weight in the dollar coin was a nod to bimetallism, although it had the effect of further driving the silver dollar coin from commerce. Foreign coins, including the Spanish dollar, were also widely used[1] as legal tender until 1857.

With the enactment (1863) of the National Banking Act during the American Civil War and its later versions that taxed states' bonds and currency out of existence, the dollar became the sole currency of the United States and remains so today.

In 1878, the Bland-Allison Act was enacted to provide for freer coinage of silver. This act required the government to purchase between $2 million and $4 million worth of silver bullion each month at market prices and to coin it into silver dollars. This was, in effect, a subsidy for politically influential silver producers.

The discovery of large silver deposits in the Western United States in the late 19th century created a political controversy. Due to the large influx of silver, the value of silver in the nation's coinage dropped precipitously. On one side were agrarian interests such as the United States Greenback Party that wanted to retain the bimetallic standard in order to inflate the dollar, which would allow farmers to more easily repay their debts. On the other side were Eastern banking and commercial interests, who advocated sound money and a switch to the gold standard. This issue split the Democratic Party in 1896. It led to the famous "cross of gold" speech given by William Jennings Bryan, and may have inspired many of the themes in The Wizard of Oz. Despite the controversy, the status of silver was slowly diminished through a series of legislative changes from 1873 to 1900, when a gold standard was formally adopted. The gold standard survived, with several modifications, until 1971.

Gold standard

Bimetallism persisted until March 14, 1900, with the passage of the Gold Standard Act, which provided that:

"...the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard..."

Thus the United States moved to a gold standard, made gold the sole legal-tender coinage of the United States, and set the value of the dollar at $20.67 per ounce (66.46 ¢/g) of gold. This made the dollar convertible to 1.5 g (23.22 grains)—the same convertibility into gold that was possible on the bimetallic standard.

The gold standard was suspended twice during World War I, once fully and then for foreign exchange. At the onset of the war, US corporations had large debts payable to European entities, who began liquidating their debts in gold. With debts looming to Europe, the dollar to British pound exchange rate reached as high as $6.75, far above the (gold) parity of $4.8665. This caused large gold outflows until July 31, 1914 when the New York Stock Exchange closed and the gold standard was temporarily suspended. In order to defend the exchange value of the dollar, the US Treasury Department authorized state and nationally-charted banks to issue emergency currency under the Aldrich-Vreeland Act, and the newly-created Federal Reserve organized a fund to assure debts to foreign creditors. These efforts were largely successful, and the Aldrich-Vreeland notes were retired starting in November and the gold standard was restored when the New York Stock Exchange re-opened in December 1914 [2].

As the United States remained neutral in the war, it remained the only country to maintain its gold standard, doing so without restriction on import or export of gold from 1915-1917. During the participation of the US as a belligerent, President Wilson banned gold export, thereby suspending the gold standard for foreign exchange. After the war, European countries slowly returned to their gold standards, though in somewhat altered form [2][3].

A gold-standard 1928 one-dollar bill. It is identified as a "United States Note" rather than a Federal Reserve note and by the words "Will Pay to the Bearer on Demand," which do not appear on today's currency. This clause became obsolete in 1933 but remained on new notes for 30 years thereafter.

During the Great Depression, every major currency abandoned the gold standard. Among the earliest, the Bank of England abandoned the gold standard in 1931 as speculators demanded gold in exchange for currency, threatening the solvency of the British monetary system. This pattern repeated throughout Europe and North America. In the United States, the Federal Reserve was forced to raise interest rates in order to protect the gold standard for the US dollar, worsening already severe domestic economic pressures. After bank runs became more pronounced in early 1933, people began to hoard gold coins as distrust for banks led to distrust for paper money, worsening deflation and gold reserves [2][3].

The Gold Reserve Act

In early 1933, in order to fight severe deflation Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin. These acts included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act[2]. These actions were upheld by the US Supreme Court in the "Gold Clause Cases" in 1935[4].

For foreign exchange purposes, the set $20.67 per ounce value of the dollar was lifted, allowing the dollar to float freely in foreign exchange markets with no set value in gold. This was terminated after one year. Roosevelt attempted first to restabilize falling prices with the Agricultural Adjustment Act, however, this did not prove popular, so instead the next politically popular option was to devalue the dollar on foreign exchange markets. Under the Gold Reserve Act the value of the dollar was fixed at $35 per ounce, making the dollar more attractive for foreign buyers (and making foreign currencies more expensive to those holding US dollars). The higher price increased the conversion of gold into dollars, allowing the U.S. to effectively corner the world gold market [5][6].

The suspension of the gold standard was considered temporary by many in markets and in the government at the time, but restoring the standard was considered a low priority to dealing with other issues [2][5].

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. The need for the U.S. government to maintain both a $35 per troy ounce (112.53 ¢/g) market price of gold and also the conversion to foreign currencies caused economic and trade pressures. By the early 1960s, compensation for these pressures started to become too complicated to manage.

In March 1968, the effort to control the private market price of gold was abandoned. A two-tier system began. In this system all central-bank transactions in gold were insulated from the free market price. Central banks would trade gold among themselves at $35 per troy ounce (112.53 ¢/g) but would not trade with the private market. The private market could trade at the equilibrium market price and there would be no official intervention. The price immediately jumped to $43 per troy ounce (138.25 ¢/g). The price of gold touched briefly back at $35 (112.53 ¢/g) near the end of 1969 before beginning a steady price increase. This gold price increase turned steep through 1972 and hit a high that year of over $70 (2.25 $/g). By that time floating exchange rates had also begun to emerge, which indicated the de facto dissolution of the Bretton Woods system. The two-tier system was abandoned in November 1973. By then the price of gold had reached $100 per troy ounce (3.22 $/g).

Cancellation of the gold standard

In the early 1970s, inflation caused by rising prices for imported commodities, especially oil, and spending on the Vietnam War, which was not counteracted by cuts in other government expenditures, combined with a trade deficit to create a situation in which the dollar was worth less than the gold used to back it.

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.

In 1972, the United States reset the value to 38 dollars per troy ounce (122.17 ¢/g) of gold. Because other currencies were valued in terms of the U.S. dollar, this failed to resolve the disequilibrium between the U.S. dollar and other currencies. In 1975 the United States began to float the dollar with respect to both gold and other currencies. With this the United States was, for the first time, on a fully fiat currency.

US dollar value vs. gold value

The sudden jump in the price of gold after central banks gave up on controlling it was a strong sign of a loss of confidence in the U.S. dollar. In the absence of a gold-market-valued U.S. dollar, investors were choosing to continue putting their faith in actual gold. Consequently, the price of gold rose from $35 per troy ounce (1.125 $/g) in 1969 to almost $900 (29 $/g) in 1980.

File:Value of US dollar.gif
This graph shows the final closing value of the U.S. dollar for each calendar year. Value is measured in milligrams of gold. By this measure the U.S. dollar lost a great amount of value during the 1970s.

Shortly after the gold price started its ascent in the early 1970s, the price of other commodities such as oil also began to rise. While commodity prices became more volatile, the average exchange rate between oil and gold remained much the same in the 1990s as it had been in the 1960s, 1970s and 1980s.

Fearing the emergence of a specie gold-based economy separate from central banking, and with the corresponding threat of the collapse of the U.S. dollar, the U.S. government approved several changes to the trading on the COMEX. These changes resulted in a steep decline in the traded value of precious metals from the early 1980s onward.

In September 1987 under the Reagan administration the U.S. Secretary of the Treasury James Baker made a proposal through the IMF to use a commodity basket (which included gold) as a reference point to manage national currencies. However, the stock market Crash of October 1987 followed by the Iran-Contra scandal distracted the administration from such plans, and political momentum was lost.

As of May 2004, the U.S. reserve assets include $11,045,000,000 of gold stock, valued at $42.2222 per fine troy ounce (1.36 $/g)[citation needed].

Silver standard

"Five Silver Dollars" of Series 1923
First small-sized $1 bill which was issued in 1928 as a silver certificate

United States silver certificates were a type of representative money printed from 1878 to 1964 in the United States as part of its circulation of paper currency.[7] They were produced in response to silver agitation by citizens who were angered by the Fourth Coinage Act, and were used alongside the gold-based dollar notes. The silver certificates were initially redeemable in the same face value of silver dollar coins, and later in raw silver bullion.

Since the early 1920s, silver certificates were issued in $1, $5, and $10 notes. In the 1928 series, only $1 silver certificates were produced. Fives and tens of this time were mainly Federal Reserve notes, which were backed by and redeemable in gold. In 1933, the Agricultural Adjustment Act was passed, which included a clause allowing for the pumping of silver into the market to replace the gold. A new 1933 series of $10 silver certificate was printed and released, but not many were released into circulation.

In 1934, a law was passed in Congress that changed the obligation on Silver Certificates so as to denote the current location of the silver.

The last government regulation regarding the silver standard was in 1963, when President John F. Kennedy issued Executive Order 11110, authorizing the Department of Treasury to issue silver certificates for any silver held by the U.S. Government in excess of that not already backing issued certificates. These redeemable silver certificates were issued for a short period in notes of $5, but they were eventually discontinued.

United States Notes

$5 United States Note of Series 1963.
$100 United States Note of Series 1966.

A United States Note, also known as a Legal Tender Note, was a type of paper money that was issued from 1862 to 1971 in the U.S. Having been current for over 100 years, they were issued for longer than any other form of U.S. paper money. They were known popularly as "greenbacks" in their day, a name inherited from the Demand Notes that they replaced in 1862.

While issuance of United States Notes ended in January 1971, existing United States Notes are still valid currency in the United States today, though rarely seen in circulation.

Both United States Notes and Federal Reserve Notes are parts of the national currency of the United States, and both have been legal tender since the gold recall of 1933. Both have been used in circulation as money in the same way. However, the issuing authority for them came from different statutes.[8] United States Notes were created as fiat currency, in that the government has never categorically guaranteed to redeem them for precious metal - even though at times, such as after the specie resumption of 1879, federal officials were authorized to do so if requested.

The difference between a United States Note and a Federal Reserve Note is that a United States Note represented a "bill of credit" and was inserted by the Treasury directly into circulation free of interest. Federal Reserve Notes are backed by debt purchased by the Federal Reserve, and thus generate seigniorage for the Federal Reserve System, which serves as a lending intermediary between the Treasury and the public.

Fiat standard

Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note.[9] Consequently, proponents of the intrinsic theory of value believe that the dollar has little intrinsic value (i.e., none except for the value of the paper) and is only valuable as a medium of exchange.[citation needed]

In 1963, the words "PAYABLE TO THE BEARER ON DEMAND" were removed from all newly issued Federal Reserve notes. Then, in 1968, redemption of pre-1963 Federal Reserve notes for gold or silver officially ended. The Coinage Act of 1965 removed all silver from quarters and dimes, which were 90% silver prior to the act. However, there was a provision in the act allowing some coins to contain a 40% silver consistency, such as the Kennedy Half Dollar. Later, even this provision was removed, and all coins minted for general circulation are now mostly clad. The content of the nickel has not changed since 1946.[citation needed]

All circulating notes, issued from 1861 to present, will be honored by the government at face value as legal tender. This means only that the government will give the holder of the notes new federal reserve notes in exchange for the note (or will accept the old notes as payments for debts owed to the federal government). The government is not obligated to redeem the notes for gold or silver, even if the note itself states that it is so redeemable. Some bills may have a premium to collectors.[citation needed]

The only exception to this rule is the $10,000 gold certificate of Series 1900, a number of which were inadvertently released to the public because of a fire in 1935. A box of them was literally thrown out of a window. This set is not considered to be "in circulation" and, in fact, is stolen property. However, the government canceled these banknotes and removed them from official records. Their value, relevant only to collectors, is approximately one thousand US dollars.[citation needed]

According to the Federal Reserve Bank of New York, there was $829 billion in total US currency in worldwide circulation as of December 2007.[10]

In September 2004, it was estimated that if all the gold held by the U.S. government (261.7 million ounces = 8.14 million kilograms = 8,140 tonnes) were again required to back the circulating U.S. currency ($733,170,953,704), gold would need to be valued at $2,800/ounce ($90/gram).[citation needed]

Color and design

The federal government began issuing currency that was backed by Spanish dollars during the American Civil War. As photographic technology of the day could not reproduce color, it was decided the back of the bills would be printed in a color other than black. Because the color green was seen as a symbol of stability, it was selected. These bills were known as "greenbacks" for their color and started a tradition of the United States' printing the back of its money in green. In contrast to the currency notes of many other countries, Federal Reserve notes of varying denominations are the same colors: predominantly black ink with green highlights on the front, and predominantly green ink on the back. Federal Reserve notes were printed in the same colors for most of the 20th century, although older bills called "silver certificates" had blue highlights on the front, and "United States notes" had red highlights on the front.

In 1929, sizing of the bills was standardized (involving a 25% reduction in their current sizes, compared to the older, larger notes nicknamed "horse blankets"[11]). Modern U.S. currency, regardless of denomination, is 2.61 inches (66.3 mm) wide, 6.14 inches (156 mm) long, and 0.0043 inches (0.109 mm) thick. A single bill weighs about one gram and costs approximately 4.2 cents for the Bureau of Engraving and Printing to produce.

Microprinting and security threads were introduced in the 1991 currency series.

Another series started in 1996 with the $100 note, adding the following changes:

  • A larger portrait, moved off-center to create more space to incorporate a watermark.
  • The watermark to the right of the portrait depicting the same historical figure as the portrait. The watermark can be seen only when held up to the light (and had long been a standard feature of all other major currencies).
  • A security thread that will glow red when exposed to ultraviolet light in a dark environment. The thread is in a unique position on each denomination.
  • Color-shifting ink that changes from green to black when viewed from different angles. This feature appears in the numeral on the lower right-hand corner of the bill front.
  • Microprinting in the numeral in the note's lower left-hand corner and on Benjamin Franklin's coat.
  • Concentric fine-line printing in the background of the portrait and on the back of the note. This type of printing is difficult to copy well.
  • The value of the currency written in 14pt Arial font on the back for those with sight disabilities.
  • Other features for machine authentication and processing of the currency.

Annual releases of the 1996 series followed. The $50 note on June 12, 1997, introduced a large dark numeral with a light background on the back of the note to make it easier for people to identify the denomination.[12] The $20 note in 1998 introduced a new machine-readable capability to assist scanning devices. The security thread glows green under ultraviolet light, and "USA TWENTY" and a flag are printed on the thread, while the numeral "20" is printed within the star field of the flag. The microprinting is in the lower left ornamentation of the portrait and in the lower left corner of the note front. As of 1998, the $20 note was the most frequently counterfeited note in the United States.

On May 13, 2003, the Treasury announced that it would introduce new colors into the $20 bill, the first U.S. currency since 1905 to have colors other than green or black. The move was intended primarily to reduce counterfeiting, rather than to increase visual differentiation between denominations. The main colors of all denominations, including the new $20 and $50, remain green and black; the other colors are present only in subtle shades in secondary design elements. This contrasts with the euro and other currencies, in which the main banknote colors contrast strongly with one another.

The new $20 bills entered circulation on October 9, 2003, the new $50 bills on September 28, 2004. The new $10 notes were introduced in 2006. The new $5 bills on March 13, 2008. And the $100 note will eventually be redesigned, but a date has not been announced. Each will have subtle elements of different colors, though will continue to be primarily green and black. The Treasury said it will update Federal Reserve notes every 7 to 10 years to keep up with counterfeiting technology. In addition, there have been rumors that future banknotes will use embedded RFID microchips as another anti-counterfeiting tool.[13]

The 2008 $5 bill contains significant new security updates. The obverse side of the bill includes patterned yellow printing that will cue digital image-processing software to prevent digital copying, watermarks, digital security thread, and extensive microprinting. The reverse side includes an oversized purple number 5 to provide easy differentiation from other denominations.[14]

"The soundness of a nation's currency is essential to the soundness of its economy. And to uphold our currency's soundness, it must be recognized and honored as legal tender and counterfeiting must be effectively thwarted," Federal Reserve Chairman Alan Greenspan said at a ceremony unveiling the $20 bill's new design. Prior to the current design, the most recent redesign of the U.S. dollar bill was in 1996.

Current $20 front
Current $20 back

See also

Numismatics portal


  1. ^ Murray N. Rothbard. "The Mystery of Banking" (pdf), p.10, referenced 2009-08-24.
  2. ^ a b c d e Crabbe, Leland (June 1989). "The International Gold Standard and U.S. monetary policy from World War I to the New Deal". Federal Reserve Bulletin. http://findarticles.com/p/articles/mi_m4126/is_n6_v75/ai_7698825. 
  3. ^ a b Bernanke, Ben (March 2, 2004). "Remarks by Governor Ben S. Bernanke: Money, Gold and the Great Depression". At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia. http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm. 
  4. ^ "Gold Clause Cases". http://www.answers.com/topic/gold-clause-cases. Retrieved 2008-07-03. 
  5. ^ a b Meltzer, Allan H. (2004). [Expression error: Missing operand for > A History of the Federal Reserve: 1913-1951]. pp. 442–446. 
  6. ^ Investopedia.com. "The Gold Standard Revisited". http://www.investopedia.com/articles/05/030705.asp. Retrieved 2008-07-03. 
  7. ^ United States Paper Money Information Retrieved September 26, 2009.
  8. ^ U.S. Treasury - FAQs: Legal Tender Status of currency
  9. ^ Kotlikoff, Laurence (2006). "Is the United States Bankrupt?" (PDF). Federal Reserve Bank of St. Louis. http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf. 
  10. ^ "How Currency Gets into Circulation". Federal Reserve Bank of New York. http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html. Retrieved 2009-05-10. 
  11. ^ Cruikshank, Moses. The Life I've Been Living. Fairbanks: University of Alaska, 1986. ISBN 9780912006239. Page 93.
  12. ^ "U.S. Treasury and Federal Reserve Introduce New $50 Bill". US Treasury. 1997-06-12. http://www.ustreas.gov/press/releases/rr1746.htm. Retrieved 2009-05-10. 
  13. ^ [1]
  14. ^ "Note of Caution". Condé Nast Portfolio. 2008-02-19. http://www.portfolio.com/interactive-features/2008/02/New-Five. 

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