The US Dollar: The Most Traded Currency in the World
Here’s all the information you need about the US dollar, its history and its direction.
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Value and exchange rates of the US dollar
While the US dollar continues to hold its own in the forex market, its buying power dropped by more than 95% from 1774 to 2012. The table below shows just how much one could purchase in terms of equivalent amount of goods in any given year.
|Year||Equivalent buying power (USD)|
Different currencies peg to the US dollar. The use of the USD as a benchmark in forex trading is all too common and just about every central bank in the world holds US dollar reserves. Due to this, the commodity market results in the USD having a direct effect on prices of commodities.
Since the US dollar finds global acceptance, various countries use it as official legal tender. Some of these include Panama, Ecuador, East Timor, El Salvador, Palau and Zimbabwe. There are other countries and territories that still find the USD as an alternative mode of payment.
Price inflation has a direct impact on the USD’s value. The American Bureau of Labour Statistics publishes a consumer price index (CPI) that works as a measure in estimating average prices of goods and service in the country. It shows that the CPI increased by around 20% from 1913 to 2014.
The establishment of the Federal Reserve came about to deliver ‘elastic’ currency that could be subject to noticeable changes in quantity over short time periods. This was in difference with previously common high-powered money forms like national banks note, silver coins and gold.
Looking at the long-term picture, the gold standard used previously worked well in keeping prices stable. For example, there was no significant change in the value and price level of the USD from the 1880s to 1914.
Wars like the American Civil War, World War I and World War II led to a significant decline in the value of the USD. The Federal Reserve has initial success in maintaining the USD’s value and price stability. It managed to reverse the inflation caused by World War I and the USD saw stability in value in the 1920s. However, prices in the US witnessed more than 30% deflation during the 1930s.
The end of World War II saw the establishment of the Bretton Woods system, with the value of gold fixed at USD 35 per ounce. This saw the USD’s value anchoring to the value of gold. The 1960s saw increased spending by the US government, but this created doubt about the country’s ability to maintain the given convertibility. Gold stocks began to fall because investors rushed to convert US dollars to gold, which led to a decline in value of the USD.
With the threat of a currency crisis looming large, and with growing fears that the US could no longer convert dollars to gold, President Nixon decided to do away with gold convertibility in 1971. While maintaining the value of the USD was then in the hands of the Federal Reserve, it continued increasing the supply of money, which led to a further decline in value of the USD during the 1970s. This currency lost almost two thirds of its value from 1965 to 1981.
After the appointment of Paul Volcker as Chairman of the Federal Reserve in 1979, there was a tightening in the supply of money and inflation fell during the 1980s, which led to the stabilisation of the USD.
In 3 decades, from 1981 to 2009, the USD dropped to less than half in value. The Federal Reserve not targeting zero inflation, but a low and stable rate of inflation instead, is probably the reason behind the USD losing its value during this time period.
Its exchange rates have witnessed noticeable shifts against major currencies over time, as you can see in the table below.
|Chinese Renminbi yuan||2.46||1.7050||4.7832||8.2784||8.1936||6.7696||6.1620|
History of the US dollar
The United States and individual states started issuing ‘continental currency’ in 1775. The country passed the Mint Act in 1972, at which point the dollar stood defined as 24.056 g of silver. These were comparable to the Spanish dollar in composition as well as style. Other than US dollars, the use of Spanish dollars and Mexican pesos as legal tender remained prevalent until 1857.
There was a shift to the gold standard in 1834, when one dollar stood defined at 1.50 g, and a slight adjustment in 1937 took it to 1.505 g. The Civil War led to the backing of precious money to issue paper money in 1862, but issuing of gold and silver coins continued. Reinstatement of the link between coins and paper money took place in 1878.
In 1900, the Gold Standard Act did away with the bimetallic standard and went on to define the dollar as 1.505 g of gold. An executive order issued by President Roosevelt in 1933 saw the confiscation of all gold coins, and the gold standard changed to 0.888 g, which stayed in effect until 1968. The issuing of silver coins continued until 1964, and the last batch of half silver dollars saw light of day in 1970.
The US set in place different pegs to gold from 1968 to 1975, and the last peg exceeded USD 40. After this point, the USD started floating freely in the forex market.Back to top
Coins and banknotes of the US dollar
The United States minted its first dollar in 1794. It went on to mint coins in different denominations, and the ones mentioned below continue to remain in mainstream usage.
- Cent (Penny)
- Five-cent Nickel
- Half dollar
- Dollar coin
- American Silver Eagle $1 (1 troy ounce) silver bullion coin
- American Gold Eagle $5 (1/10 troy oz), $10 (1/4 troy oz), $25 (1/2 troy oz), and $50 (1 troy oz) Gold bullion coin
- American Platinum Eagle ($10, $25, $50, and $100 platinum coin)
It also issues banknotes in the following denominations, and each comes with a portrait of an American President:
- One dollar (George Washington)
- Two dollars (Thomas Jefferson)
- Five dollars (Abraham Lincoln)
- Ten dollars (Alexander Hamilton)
- Twenty dollars (Andrew Jackson)
- Fifty dollars (Ulysses S. Grant)
- Hundred dollars (Benjamin Franklin)
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