Besides being the official currency of the world’s largest economy, the US dollar is also the world’s dominant reserve currency and is used in most international transactions. Many currencies around the world are valued relative to or even pegged to the US dollar. Its importance cannot be understated.
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Fast Facts: US Dollar
- US dollar Symbol: $
- US Currency Code: USD
- Coins: 1¢, 5¢, 10¢, 25¢, (rare) 50¢ and $1
- Notes: $1, $5, $10, $20, $50, $100, (rare) $2
- United States GDP (nominal): $17.418 trillion (1st)
- Central Bank: Federal Reserve System
US dollar History
The history of American currency begins with the money and commodities used by the British in the colonies. The thirteen colonies would eventually go on to issue individual currencies until the Continental Congress issued Continental currency after the outbreak of the Revolutionary War in 1775. The lack of coordination between the states and the Congress along with the war expenses and British actions caused the currency to depreciate badly. The phrase “not worth a Continental” was popularized during this time in reference to the poor shape of the currency.
The United States Mint was formed in 1792 and the first dollar coins were issued. It wasn’t until the National Bank Act of 1863 and other policies following the Civil War that the US dollar became the sole currency of the country however. Throughout the 1800’s, the dollar fluctuated between gold and silver as the base of its value. When gold rose in relation to silver, gold coins were removed from circulation and melted down. New gold coins were later released, though they were lighter. There remained disagreement about whether the US dollar should be tied to the gold or silver standard. In 1896, William Jennings Bryan, a dark horse nominee for the Democratic nomination for President, made a speech where he denounced the gold standard, declaring famously, “You shall not crucify mankind upon a cross of gold”. Despite this, the gold standard survived and was made the sole standard for paper money in 1900 thanks to the Gold Standard Act.
The gold standard would largely remain in place until 1971, though there were periods of abandonment. Chiefly this was done during parts of World War I and the Great Depression. The Gold Reserve Act of 1934 made most private possession of gold illegal, following which it was rounded up and stored in Fort Knox.
The Bretton Woods system that came into effect in 1945 mandated that all other currencies were valued relative to the US dollar, which remained tied to gold. This would remain in effect for over two decades. By 1971 the US dollar was suffering from high inflation and there was pressure to leave the Bretton Woods system. Richard Nixon unilaterally removed the convertibility of the US dollar to gold. This is known as the Nixon shock and was a major factor in the complete removal of the Bretton Woods system. The free-floating currency market we have today replaced it.
Since 1981, the dollar’s value has steadily dropped because the Fed targets a low, stable inflation rate as opposed to zero inflation. Following the end of the Cold War, the US emerged as the dominant global economic power. While the Global Financial Crisis in 2008 certainly hurt the US dollar, it remains the most important currency in the world today.
US dollar Notes and Coins
The US dollar has gone through many iterations since its inception. The first major series of banknotes was the ‘United States Note’, which was in circulation from 1862 to 1971. Originally released in order to help the Union pay for the civil war, these notes were popularly known as greenbacks, a synonym for American bills to this day. Though the notes are no longer issued, they are still legal tender despite their rarity. Other types of banknotes issued include Gold and Silver certificates, which were redeemable for the precious metal in question.
The banknotes used today are known as Federal Reserve Notes, and they have been in use since 1914. There have numerous series released over the years, featuring a variety of denominations and designs. Most bills (even earlier iterations of the dollar) have always featured former (deceased) presidents, giving rise to the term ‘dead presidents’ as a nickname for the money. Of the commonly circulated bills George Washington appears on the $1, Abraham Lincoln on the $5, Alexander Hamilton on the $10 (not a president), Andrew Jackson $20, Ulysses S. Grant $50, and Benjamin Franklin $100 (not a president). The rare $2 bill features Thomas Jefferson and John Trumbull’s ‘The Declaration of Independence’ on the back. The other bills feature various American landmarks (Lincoln Memorial, The White House, Independence Hall, etc.) except for the $1, which features the Great Seal of the United States. Other, higher denomination bills were once produced including one worth $100,000, though these are not used.
American coins date back all the way to 1792. Pennies, nickels, dimes, and quarters are the most common denominations of coins seen in the US. These feature Lincoln, Jefferson, FDR, and Washington respectively. 50¢ and $1 coins can also be found in circulation though they are in limited quantities. JFK is found on the 50¢ coin while the $1 coin can feature Dwight D. Eisenhower (obsolete but still legal tender), social reformer Susan B. Anthony, Sacagawea (who accompanied Lewis and Clark), and special coins featuring each deceased president. There is occasional talk of eliminating the penny from circulation though this has not happened yet.
US dollar Value
Because the Fed has generally targeted a steady, low inflation rate, the buying power of the USD now versus 1774 is incredibly low. A dollar bill from 2 years ago would be worth about 3¢ in 1774. 1 USD generally has less value that the GBP and EUR, while retaining a higher value than most other currencies around the world. Though 1 CAD sometimes can buy more than 1 USD, this is a rarity.
This can be seen over the last 10 years when comparing exchange rates between the USD and CAD. The highest value reached was 0.777 USD per CAD on March 6, 2009. On the other hand, the value declined all the way to 1.0695 USD per CAD on November 2, 2007. The value of the CAD was also higher than the USD throughout much of 2011 and part of 2012, among a few other spikes. In recent years, the USD has been strong while the CAD has suffered, partly due to falling oil prices.
The United States economy is the largest in the world and, as such, it has tremendous global importance. A large amount of natural resources, developed infrastructure, a large population, and high productivity are all reasons why the US economy such a behemoth. The New York Stock Exchange is the largest stock market in the world and contributes towards making the US a popular place to do business – many of the world’s largest companies are based in the United States. In addition, the high amount of spending by American citizens and large amount of immigration to add to the labour pool have helped to grow the economy.
The US is both the second largest manufacturer and trading country in the world. Some of the key industries in the US are cars, airplanes, telecommunications, food processing, mining, lumber, steel, electronics, and others. In addition, the US produces the third highest amount of oil and natural gas, and is no longer the largest importer of oil. While agriculture is only a small portion of the economy, the US is still a net exporter of food.
All of this together means the US economy is highly diversified and robust. While slowdowns in one particular sector may hurt the economy, the sheer amount of viable industries gives the United States a degree of staying power.
There are problems of course. The income gap is large between the rich and poor, something that has garnered quite a lot of attention recently. In addition, unemployment is still a problem, though it has decreased significantly in recent years. While the US has recovered well from the Global Financial Crisis, there are still lingering issues and slowdowns. These have only been exacerbated due to the effects of COVID-19.
Both the US dollar and US economy have huge importance across the globe. The dollar is almost always the point of comparison for other currencies, as well as being the world’s most common reserve currency. Though other countries, namely China, are rapidly rising in economic terms, the US remains hugely influential and important across the financial world.
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