The History of USD: The United States Dollar

The History of USD: The United States Dollar

  • Posted on 1515-0707-2022
  • by Gareth McCauley

 

Today, the dollar is one of the strongest currencies in the world. It’s officially in use in the United States and has been adopted by other countries. Somewhere between ½ and ⅔ of the circulated U.S. currency is outside the U.S.

But how did the U.S. dollar make its way to the top?

The currency as we know it today doesn’t show up until the 20th century, but money in America has a much longer history. Read more to find out where the dollar came from and how it dominated the world’s markets.

 

Early Documentation of US Paper Bills – 1960

The oldest records of U.S. paper currency go back to the 1690s when the Massachusetts Bay Colony issued colonial notes to finance military expeditions. Other colonies soon followed and produced their own bills of credit.

 

Continental Currency – 1775

In 1775, the American Revolutionary War became inevitable. The Continental Congress issued a new form of paper currency, Continentals, to fund the military expenditures.

The Continental currency encountered several issues. One of them is that a large amount of money was being printed without bullion backing. This, and the emergence of counterfeits, would lead to the currency’s massive devaluing.

Congress stopped producing Continentals in 1779, and by the time the war ended, they were considered near worthless.

 

Adopting the Dollar Sign – 1785

Although Continental was denominated in dollars, it lacked the familiar dollar sign we know today. The Continental Congress officially established the dollar as the U.S. currency in 1785, with the symbol derived from the Spanish American figure for pesos.

Simultaneously, Congress decided that the money would be based on a decimal system – 100 cents to a dollar.

 

The Bank of the United States – 1791

After the Revolutionary War, the U.S. was in financial chaos. By 1785, Continentals had depreciated so much that people no longer accepted them as payment.

Alexander Hamilton proposed a national bank to stabilise the economy and establish financial order. In 1791, the Bank of the United States was founded in Philadelphia.

 

Coinage Act of 1792

The 1792 Coinage Act formed the U.S. coinage system and the first U.S. Mint. The act laid the foundation for the nation’s future monetary system.

The currency circulated as only coins for decades, but the need for financing growth brought about the return of paper currency.

 

The Return of Dollar Bills

By the 19th century, the U.S. decided to give paper notes another go. In the 1860s, new bills were printed out to help finance the Civil War. These notes were green on the back; thus, they were called “greenbacks”.

The inking, treasury seals, and engraved signatures were meant to prevent counterfeiting.

Although greenbacks had government backing, they couldn’t be redeemed for gold or silver. However, the Specie Payment Resumption Act of 1875 restored the gold standard and ensured that all paper money could be exchanged for gold by 1879.

 

The Federal Reserve Act – 1913

The 1913 Federal Reserve Act led to the establishment of the Federal Reserve System as the nation’s central bank. It gave the Federal Reserve the ability to print money and oversee monetary policy in an attempt to establish and ensure economic stability.

 

The U.S. Dollar as the Reserve Currency

In the 20th century, war had left Europe in disarray and made way for the United States to emerge as the dominant economic power. In 1944, the Bretton Woods Agreement was formed, and the U.S. dollar became the world’s reserve currency.

The dollar was pegged to gold. In turn, many foreign countries tied their currencies’ exchange rates to the dollar in an attempt to stabilise them.

However, the U.S. continued to print more money that exceeded the backing of gold reserves. Since paper dollars continued to flood markets, foreign countries became cautious and started to convert dollar reserves into gold.

 

Abandoning the Gold Standard

Following several runs on the dollar, in 1971, President Nixon enacted a set of economic policies. The Bretton Woods system wasn’t formally abolished; however, the U.S. abandoned the gold standard and no longer converted dollars to gold at a fixed value. This led to the current system of fiat currency and floating exchange rates.

 

The U.S. Dollar in the Market Today

Historically, governments, large companies, and hedge funds were the only ones engaging in foreign exchange with the dollar. But today, any interested individual can trade currencies.

You can get started this moment with Fair Forex – one of the FX market’s most trusted and fair brokers. Get quality broker services that work in your favour with complete transparency. For more questions, visit our help centre.