The History of the US Dollar Pt. 1

The Dollar has a long and storied history, stretching back as far as the 16th century, and by the time it was appropriated by the newly formed United States of America as the official US currency, it had already been in use for centuries in countries around the world.

Origins of the Word ‘Dollar’  

The word ‘dollar’ is an Anglicised version of ‘thaler’, which itself is a shortening of the original name for the currency, Joachimsthaler. The first Joachimsthalers were minted in 1519 in the town of Joachimsthal, Bohemia (now Jachymov in the Czech Republic), an area rich with silver deposits. These large silver coins became widely accepted across Europe, and other similar coins such as the Spanish peso and the Portuguese eight-real coin came to be referred to by the English version of the name, dollar. The Spanish dollar became popular in Britain’s North American coloniesdue to a lack of official British coins, and this is the main reason why the US plumped for the dollar as their official currency rather than the pound.

The $ Sign

The dollar sign ($) is a more recent development than the name, although its origins are a lot less clear-cut, unlike the British pound symbol which has well-documented origins. In fact, nobody really knows where it came from or how the design was arrived at. There are, however, several theories. Perhaps the most popular theory is that the sign is derived from the initials of the United States, with the ‘S’ being superimposed onto a slimmer, taller ‘U’, which gives you a dollar sign with two upward strokes. Another theory has it that the sign is derived from the sign for the Spanish Peso, which is a large ‘P’ with a small ‘s’ above it and to the right, simplified by removing the curved section of the ‘P’ and superimposing the ‘S’. This would not explain why the dollar is sometimes written with two strokes, however. One possible theory behind this is that the most popular Spanish peso had two pillars on it, which became known as the Pillar Dollar in North American colonies. Another theory linking it with the peso is that the peso was divided into eight reals, or ‘pieces of eight’, the symbol for which was ‘/8/’. After a while, it became common to draw the oblique strokes through the 8, and it may be that people switched to an S to make the symbol easier to draw. Other theories would have it that the dollar sign is derived from the Potosi mint mark (the letters PTSI superimposed on one another), the abbreviation for the British shilling (s), the symbol used for marking hand counted sheets of paper (s with a line through it), or even a reference to slavery.

 Establishment of the US Dollar

The US dollar was approved by Congress in 1785, and became the official US base currency seven years later. In 1834, fluctuations in the value of silver relative to gold necessitated a change in the ratio between silver and gold in the US dollar from 15:1 to 16:1, which reduced the value of gold in the dollar was reduced by 6% – the first time the US dollar was ever devalued. The weights of US silver coins (with the exception of the dollar, which was rarely used) were reduced in 1853, which effectively placed the nation on the gold standard.

The Gold Standard

During the American Civil War, the enactment of the National Banking Act of 1863 rose taxes on states’ bonds and currency to the point where they could no longer be used, and the dollar became the sole currency of the US. The discovery of massive silver deposits in the Western United States in the late 19thcentury caused the value of silver in US coins to drop dramatically. This led to the official adoption of the gold standard in 1900, which valued the dollar against a predetermined weight of gold, initially 1.5g. The gold standard was suspended twice during the First World War, but by the end of the war the US was the only country to have retained gold convertibility, with other nations having abandoned the gold standard altogether. Many European nations brought it back, albeit in altered form, a few years later.

English: 1900 US political poster showing McKi... Every major currency abandoned the gold standard during the Great Depression in response to speculators’ demands for gold in exchange for currency, which was destabilizing monetary systems. In the wake of a series of bank runs in early 1933, many people began to hoard gold due to a lack of trust in banks and paper money. This depleted gold reserves and magnified the problem of deflation. In response to this crisis, President Roosevelt and Congress suspended the gold standard, except for foreign exchange,

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, stripped gold of its status as legal tender, and outlawed the ownership of large amounts of gold coins. In 1935, the gold standard was abolished, and the dollar floated freely on foreign exchange markets until the end of World War II.

Bretton Woods

In an effort to restore stability to the world economy towards the end of World War II, an agreement was reached at a conference in Bretton Woods, New Hampshire, to set up a new fixed-ratio foreign exchange system. This system, which was called the Bretton Woods system, once again tied the value of the dollar to a certain weight of gold, and all other currencies were assigned a fixed value in relation to the dollar. This system held for a couple of decades, but by the early 1960s the system was beginning to come under pressure due to the difficulties of maintaining the price of gold and in keeping conversion ratios constant in the face of diverging economies. The ratios were tweaked accordingly, and in 1968 the US ceased to try to control the market price of gold. At this time, the US economy was coming under great strain, due to the mounting cost of the Vietnam war, high inflation (especially with regard to imported goods), and increased export competition from other nations, particularly Japan. The emerging Japanese manufacturing sector was experiencing something of a boom, and its hugely undervalued currency allowed them to significantly undercut American manufacturers.

 The Nixon Shock

In an effort to address these factors, the Nixon administration cancelled the direct convertibility of the US dollar into gold, leading to the immediate demise of the Bretton Woods system and the beginning of the modern foreign exchange (FX) market. In the decade that followed, the price of gold relative to the dollar went through the roof, rising from $35 per ounce in 1969 to nearly $500 in 1980, and other commodities such as oil followed a similar pattern.

 Fiat Currency

Today, like most modern currencies, the US dollar is a ‘fiat’ currency, which means that it has no fixed value in terms of commodities such as gold or silver. Its value fluctuates in accordance with the laws of supply and demand on the currency exchange market, and the government can print extra notes to boost the economy when it is required, a process known as quantitative easing.