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History of the Dollar

The US dollar was officially launched by America’s Continental Congress on September 8, 1786. However, the dollar can trace its roots all the way back to 16th century Bavaria.

How did the US dollar come to be one of the world’s largest and most widely-accepted currencies? Where does the value of the US dollar come from? And where is the dollar going in the future? Today, we’re explaining everything you need to know about the history of the dollar.

The Dollar Originated in Bavaria in 1518

If you asked someone where the US dollar first began, they would probably guess America.

But that’s not entirely true. Many historians place the beginnings of the dollar to a small town in Bavaria. In 1518, that town began issuing standardized silver coins using silver from a nearby mine.

These coins were issued at a standardized weight of 29.2 grams. The coins were called “thalers” because “thal” means “valley” in German, and the coins came from a valley. Get it?

Countries across Europe soon came to recognize the value of a standardized currency system. Countries adopted the standardized thaler coin from commerce. Different governments used different silver and different production methods, but all the thalers were virtually identical.

Europe was on a “thaler” standard. You don’t have to change the pronunciation of “thaler” very much to get “dollar” – which is where the name dollar would eventually come from.

The Spanish Silver Dollar

As the Old World began to explore the New World, the thaler or dollar became more and more ubiquitous.

Spanish explorers discovered rich mines in Mexico and other new colonies. They used these mines to produce the Spanish silver dollar. In just years, the Spanish silver dollar became the most common coin in all of the American colonies

Despite its ubiquity, the Spanish silver dollar was far from the only coin in the colonies: silver dollars from the Old World continued to be used throughout the Americas. This tended to complicate transactions at the time – which is why the US began to fight to adopt a standardized currency.

America Before the US Dollar

Before America was officially a country, the colonies had to use something as a currency.

The origins of money in America can be traced back to 17th century Massachusetts. In 1690, the Massachusetts Bay Colony used paper notes to finance military expeditions. Seeing the success of this system, other US colonies quickly followed.

The British eventually imposed restrictions on these early colonial paper currencies. In 1775, when anti-British sentiment was rising, the Continental Congress would choose the Continental currency as its official standard. That currency, however, would not last very long. It did not have sufficient financial backing and the notes were too easy to counterfeit.

The US Congress Adopts the Thaler As Its First Official National Currency

Soon after the American Revolution, US Congress had a big decision to make: what would the young country use at its official currency?

In 1785, US Congress decided to adopt the European thaler as the standard across America. At this point, the original German word “thaler” was being replaced by the Anglicized “dollar”. The two were pronounced in a very similar way.

The Coinage Act of 1792 solidified the US dollar as the nation’s official currency: that act implemented an organized monetary system featuring gold, silver and copper.

The U.S. dollar was slightly lighter than the original thalers used throughout the Old World: it weighed in at 27 grams of silver.

1861 and the Civil War

The US Civil War took place between 1861 and 1865. At this time, America realized a major problem: it needed money to fight the war, but it only had a finite amount of gold, silver, and copper reserves.

Thus, America began to issue paper notes or greenbacks into the system started in 1861 to help finance the Civil War.

Of course, paper notes were easier to counterfeit than traditional metal coins. Around this time, the US treasury began implementing different counterfeit-fighting measures – including a Treasury seal and engraved signatures.

By 1863, Congress had introduced a national banking system that granted the US Treasury permission to oversee the issuance of National Bank notes. This gave national banks the power to distribute money and purchase US bonds more easily while still being regulated.

Federal Reserve Act of 1913

The Federal Reserve Act of 1913 created one central bank and introduced a national banking system. The goals of these two entities were to keep up with the rapidly changing financial needs of the country.

The Federal Reserve Board would eventually create a new currency called the Federal Reserve Note. The first “Note” introduced was a ten dollar bill, introduced in 1914.

The Federal Reserve Board decided to implement two major changes to the design of the bills:

  • The Board decided to reduce the size of the notes by 30% to lower manufacturing costs
  • The same designs were printed on all denominations, once again to save manufacturing costs

The design of the US bills would not change until 1996, when rampant counterfeiting forced the US to implement a series of security improvements.

Nevertheless, the US dollar remains a unique currency to this day for having virtual identical designs across its bill denominations in terms of size, shape, and color.

The Relationship Between Silver and Gold

You may have noticed that the thaler or dollar was originally built on the price of silver. However, most of us associate the value of modern currencies like the US dollar with the price of gold.

When did things change?

Well, silver and gold traded at virtually identical ratios throughout history. This was known as the “bimetallic” system of trading. Over the centuries, one ounce of gold was consistently worth about 15 or 16 ounces of silver.

Because the “thaler” system standardized the price of silver, it also, by extension, standardized the price of gold.

Gold was eventually viewed as the more stable commodity and became a more favored indicator of currency value. Britain would eventually throw out the old bimetallic system in 1816, replacing it with the monometallic system. The United States followed suit in 1834 (although the monometallic system would not be officially implemented until 1900).

In 1834, the United States passed the 1834 Coinage Act. This act locked the value of the U.S. dollar to $20.67 per ounce of gold. Each dollar was worth about 1.5048 grams of gold.

It’s easier to visualize the importance of these changes when looking at a graph. In the graph below, you can see that the “dollar” or “thaler” was an unchanging unit of value for most of 415 years, only changing in 1933:

Photo courtesy of HuffingtonPost.com

As you can see, there are several major dips in the graph. In the 1780s, the American colonies experienced a wave of hyperinflation. After the Civil War, there was another hyperinflation problem. However, after these minor inflation problems, the nation would always turn to the stable gold dollar.

That long-standing standardized value of the gold US dollar would change forever in 1933, as you can see by the sudden upheaval of the graph above.

The US Dollar Becomes Permanently Devalued in 1933

So what happened to change the dollar in 1933? In 1933, America was in the heart of the Great Depression. In an effort to spur the economy, America reduced its dollar value to $35 per ounce. One dollar was worth about 0.8887 grams of gold.

The Dollar is Devalued Again in 1971

Starting in 1971, the US dollar would be taken on another ride that would forever change its fate. Nixon’s “easy money” policies of the 1970s led to floating exchange rates. The dollar would lose about 90% of its value relative to gold, eventually stabilizing around $350 per ounce in the 1980s and 1990s.

The “Great Moderation” period, as this is called by some economists, somewhat continues to this day. We take floating exchange rates and currency fluctuations for granted: they’re just part of a global economy.

However, in reality, we’re in the middle of a great experiment – the end results of which have yet to be seen. Some argue that we’ll return to a stable global currency in the future, as it was the basis on which capitalist economies around the world were made.

Who Uses the US Dollar?

The United States dollar is the official currency of the United States. However, it’s also the world’s most common reserve currency. More governments around the world hold US dollars than any other type of currency.

At the same time, certain countries around the world use the US dollar as either their official currency or their de-facto currency. Other countries peg the value of their currency to the US dollar.

Countries and Territories That Use the US Dollar as Their Official Medium of Exchange:

  • United States of America
  • Puerto Rico
  • Ecuador
  • El Salvador
  • Zimbabwe
  • Guam
  • US Virgin Islands
  • Timor-Leste (East Timor)
  • American Samoa
  • Northern Mariana Islands
  • Federated States of Micronesia
  • Palau
  • Marshall Islands
  • British Virgin Islands
  • Turks and Caicos

There are certain unique situations on this list. Zimbabwe, for example, experienced disastrous hyperinflation throughout much of the last few decades. In 2009, the country chose to abandon its own currency and adopt eight new currencies as its official legal tender. The United States dollar is now an official currency in the country along with the South African rand, the Botswana pula, the British pound sterling, the Australian dollar, the Chinese yuan, the Indian rupee, and the Japanese yen.

Countries Where the US Dollar is Commonly Used

The countries above use the US dollar as one of their official currencies (often as the official currency).

However, there are a number of other countries where the US dollar is viewed as a “quasi-currency” of exchange. For example, the US dollar is widely accepted by retailers in Canada and Mexico. It’s also commonly used at tourist destinations around the world – particularly tourist destinations that host many Americans.

Popular tourist destinations that accept the US dollar as a de facto-currency include the Bahamas, Barbados, Bermuda, the Cayman Islands, Sint Maarten, St Kitts and Nevis, Aruba, Bonaire, Curacao, Bonaire, Sint Eustatius, and Saba. As you may have noticed, all of these islands are found in or around the Caribbean.

The Caribbean isn’t the only region that uses US dollars as a quasi-currency. You can also widely use the US dollar in Belize, Panama, Costa Rica, and Nicaragua.

Over the years, the US dollar has also been gaining ground in certain Asian nations. You will likely have success using your US dollar in the Philippines, for example, along with Myanmar (Burma), Cambodia, and Vietnam (particularly in the major cities of Vietnam).

There are also certain outlier countries – like Africa’s Liberia – that widely accept US dollars. The Old City of Jerusalem also accepts US dollars.

Dollars in Other Countries

The United States isn’t the only country that uses the term “dollar” for its official currency. Canada, Australia, and New Zealand all use the dollar as the official medium of exchange.

Since this article is a “history of the dollar”, it seems appropriate to briefly explain the history of these currencies as well.

The Canadian Dollar

When Canada was a British colony, traders mostly used the pound sterling. Inevitably, the young country of Canada did plenty of business with its southern neighbor. This led to pressure to switch from the pound sterling to a decimal-based currency similar to the American one.

Trading between the pound sterling and the US dollar was problematic because the pound sterling divided pounds into 20 shillings, and then divided the shilling into 12 pence.

Thus, there was widespread support to switch to a decimal-based system of currency to facilitate trading between Canada and America.

The British government agreed that this seemed reasonable. Between 1853 and 1857, the Province of Canada (it wasn’t an official country until 1867) would gradually switch over to its own system of Canadian dollars and cents.

Surprisingly, Canada held little autonomy over its currency in the early days of confederation: the Canadian dollar was minted in Britain until 1908, when Canada built its own Ottawa Mint.

The Australian Dollar

Canada adopted its own native currency prior to becoming a country. Australia, however, took a different route: Australia continued using the pound sterling for about 50 years after it gained its independence from Britain (Australia achieved confederation in 1901).

Like the Canadians, however, the Aussies found the pound, shilling, and pence system cumbersome. By the 1960s, Australia had replaced the Australian pound with the Australian dollar. The new Australian dollar was worth 0.5 Australian pounds. In other words, one Australian pound was now worth two Australian dollars.

The UK, by the way, would eventually decimalize its currency and get rid of the old shilling and pence system in 1971.

The New Zealand Dollar

New Zealand, similar to Australia, used the pound for decades after gaining its independence. In 1967, New Zealand began using its own dollar. Nearby countries like Fiji and the Solomon Islands would eventually adopt the New Zealand dollar as their official national currencies.

Today, Pacific island nations typically use the Australia, US, or New Zealand dollar as their official currencies. Kiribati, Tuvalu, and Nauru, for example, all continue to use the US dollar to this day.

The Rhodesian Dollar

Australia, Canada, New Zealand, and the United States weren’t the only countries to use the “dollar” as a currency.

In Africa, the British colony of Rhodesia would eventually switch from the pound to the dollar. The Rhodesian dollar was introduced as a decimalized system in 1970, replacing the old shillings and pence system. That currency would only last until 1980, when Rhodesians voted to not only change the name of their currency, but also the name of their country: today, the former British colony of Rhodesia is known as Zimbabwe. As we learned above, the new Zimbabwean currency would not survive past 2009.

Where Does the Dollar Sign Come From?

There’s one more mystery we have yet to explain about the US dollar: where does its ubiquitous “$” sign come from?

We actually don’t know for sure where that sign originated, but there are a few different theories:

United States Abbreviation Theory: Some believe the dollar symbol arose out of a combination of the letters “U” and “S”. When you put the letter “U” overtop of the letter “S”, then drop the lower part of the “U”, you get the $ symbol with two strokes through it.

Peso Theory: The Spanish peso’s abbreviation was simply “P”, but the plural form of the Peso was a large “P” with a small “s” above it and to its right. That small “s” was sometimes superimposed over top of the P, which would lead to the modern US dollar symbol.

There are also several other theories about why the dollar is displayed with a “$” symbol, but those are the two leading theories. Other theories include the “Potosi Mint Mark Theory”, the “Shilling Abbreviation Theory”, and the “Portuguese Cifrao Theory”, all of which can be read about in this informative article here.

What Does the Future Hold for the US Dollar?

Ultimately, the United States dollar is the most widely-used currency in the world. This isn’t by accident: for decades, the US dollar has been viewed as one of the world’s most stable currencies.

Sites like Investopedia are also optimistic about the future of the US dollar:

“Barring some unforeseen catastrophe, the U.S. dollar will likely remain the global currency of choice until such a futuristic time when a global digital money system is invented and accepted.”

 

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