United States dollar

Denomination ($) Portrait

1 George Washington

2 Thomas Jefferson

5 Abraham Lincoln

10 Alexander Hamilton

20 Andrew Jackson

50 Ulysses S. Grant

100 Benjamin Franklin

500† William McKinley

1000† Grover Cleveland

5,000† James Madison

10,000† Salmon P. Chase

100,000† Woodrow Wilson

†Not in general circulation.

The United States dollar is the official currency of the United States. It is also widely used as a reserve currency outside of the United States. Currently, the issuance of currency is controlled by the Federal Reserve Banking system. The most commonly used symbol for the U.S. dollar is the dollar sign ($). The ISO 4217 code for the United States Dollar is USD.

Table of contents

1 Overview
2 History

2.1 Bimetallism
2.2 The Gold Standard
2.3 Fiat Standard
2.4 Greenbacks

3 Criticisms of U.S. banknotes
4 International use of the U.S. dollar
5 Origin of the name Dollar
6 The dollar symbol
7 See also

Overview

The U.S. dollar is divided into 100 centss. Originally, it was further divided into 1000 millss.

The U.S. is one of many countries that use a currency named dollar: see dollar.

When currently issued in circulating form, denominations equal to or less than a dollar are emitted as coins while denominations equal to or greater than a dollar are emitted as Federal Reserve notes. (Both one dollar coins and notes exist; although the note form is significantly more common.)

Modern U.S. dollar banknotes have been printed by the Federal Reserve since 1929. Notes above the $100 denomination ceased being printed in 1946. These notes were used primarily in inter-bank transactions. However, with the advent of electronic banking, they became useless.

History

The dollar was unanimously chosen as the money unit for the United States on July 6, 1785. This was the first time a nation had adopted a decimal coinage system.

Until 1974 the value of the United States dollar was tied to and backed by either silver, gold, or a combination of the two. From 1792 to 1873 the U.S. dollar was freely backed by both gold and silver at a ratio of 15:1 under a system known as bimetallism. Through a series of legislative changes from 1873 to 1900, the status of silver was slowly diminished until 1900 when a gold standard was formally adopted. The gold standard survived, with several modifications, until 1974.

Bimetallism

The U.S. Coinage Act of 1792 established the United States Mint and set the following definition for a dollar:

"Dollars or Units—each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenths parts of a grain of pure, or four hundred and sixteen grains of standard silver."

It also pegged the rate of exchange between pure silver and pure gold at 15:1. Thus the dollar was defined to be 371.25 grains of silver or 24.75 grains of gold and could be exchanged at the mint for either silver or gold in this 15:1 ratio. This standard, known as bimetallism, was used through much of the nineteenth century.

In 1834, due to a drop in the value of silver, the 15:1 ratio was changed to a 16:1 ratio. This created a new US dollar that was backed by 1.50 grams (23.2 grains) of gold. However, the previous dollar had been represented by 1.60 grams (24.75 grains) of gold. The result of this revaluation which was the first ever devaluation of the US dollar reducing its gold value by 6%.

The discovery of large silver deposits in the Western United States in the late 19th century created a political controversy. At one side were agrarian interests who wanted to retain the bimetallic standard which would result in a cheaper dollar, which would allow farmers to more easily repay their debts. At the other end, there were Eastern banking and commercial interests who advocated sound money and a switch to the gold standard. This issue split the Democratic party in 1896 and led to the famous cross of gold speech given by William Jennings Bryan.

In 1878 the Bland-Allison Act was enacted to provide for freer coinage of silver. This act required the government to purchase between $2 million and $4 million worth of silver bullion each month at market prices and to coin it into silver dollars. This was, in effect, a subsidy for politically influential silver producers.

The Gold Standard

Bimetallism persisted until March 14, 1900 with the passage of the Gold Standard Act, which established:

"...the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard..."

Thus the United States moved to a gold standard and made gold the sole legal tender coinage of the United States set the value of the dollar to $20.67 per ounce of gold. This made the dollar convertible to 1.5 grams (23.2 grains)—the same convertibility into gold that was possible on the bimetallic standard.

During the Great Depression, President Franklin Delano Roosevelt revalued the dollar to 35 per troy ounce of gold. This represented a drop in the value of the US dollar. It fell to only 0.89 grams (13.7 grains) of gold. The US dollar had thus been devalued almost 41% by government decree.

Under the post-World War II Bretton Woods Agreement, all other currencies were valued in terms of United States dollars, and were thus indirectly linked to the gold standard. The need for the US government to maintain both a $35 per ounce market price of gold and also the conversion to foreign currencies caused economic and trade pressures. By the early 1960s, compensation for these pressures started to become too complicated to manage.

In March 1968, the effort to control the private market price of gold was abandoned. A two-tier system began. In this system all central bank transactions in gold were insulated from the free market price. Central banks would trade gold among themselves at $35 per ounce but would not trade with the private market. The private market could trade at the equilibrium market price and there would be no official intervention. The price immediately jumped to $43 per ounce. The price of gold touched briefly back at $35 near the end of 1969 before beginning a steady price increase. This gold price increase turned exponential through 1972 and hit a high in this year of over $70. By that time floating exchange rates had also begun to emerge which indicated the de facto dissolution of the Bretton Woods Agreement. The two-tier system was abandoned in November 1973. By then the price of gold had reached $100 per ounce.

In the early 1970s, inflation caused by rising prices for imported commodities, especially oil, and spending on the Vietnam War, which was not counteracted by cuts in other government expenditures, combined with a trade deficit created a situation in which the dollar was worth less than the gold used to back it.

In 1972, the United States reset the value to 38 dollars per troy ounce of gold. Because other currencies were valued in terms of the United States dollar, this failed to resolve the disequilibrium between the United States dollar and other currencies. In 1975 the United States began to float the dollar with respect to both gold and other currencies. With this the US was, for the first time, on a fully fiat currency.

The sudden jump in the price of gold after central banks gave up on controlling it was a strong sign of a loss of confidence in the US dollar. In the absence of a gold market valued US dollar, investors were choosing to continue to put their faith in actual gold. Consequently the price of gold rose from $35 in 1969 to almost $900 in 1980. Fearing the emergence of a specie gold-based economy separate from central banking, and with the corresponding threat of the collapse of the US dollar, the US government approved several changes to the trading on the COMEX. These changes resulted in a steep decline of the traded value of precious metals from the early 1980s onward.

US Federal Reserve notes - "Greenbacks"

Fiat Standard

Today, like the currency of most nations, the dollar is fiat money without intrinsic value. Some argue that it has no backing and would be entirely worthless, except for the fact that people have been persuaded to use and accept it as if it had worth.

According to the Bureau of Engraving and Printing, as of July 31, 2000, there were $539,890,223,079 in total currency in worldwide circulation, of which $364,724,397,100 was in the $100 denomination.

As at July 2003, it has been estimated that if all the gold held by the US government was again required to back the circulating US currency, an ounce of gold would need to be worth around $25,000.

Greenbacks

The federal government began issuing currency that was backed by Spanish dollars during the American Civil War. These bills were known as greenbacks for their color and started a tradition of the United States printing its money in green. In contrast to the currency notes of many other countries, all Federal Reserve notes are the same color. They have been printed in the same green color for most of the twentieth century.

Modern U.S. currency, regardless of denomination, is 2.61 inches wide, 6.14 inches long, and 0.0043 inches thick. A single bill weighs about one gram, and costs approximately 4.2 cents for the Bureau of Engraving and Printing to produce.

On May 13, 2003, the Treasury announced that it would introduce color into the $20 bill, the first U.S. currency since 1905 to have colors other than green or black. The move was another attempt at stemming the tide of counterfeiting. The new bills entered circulation on October 9, 2003. New $50 and $100 notes will be introduced in 2004 and 2005, each with different color schemes. The Treasury said it will update Federal Reserve notes every 7 to 10 years to keep up with counterfeiting technology.

Some techniques used today are little blue and red threads (look closely at the dollar), the number in the lower right corner changing from green to silver when viewed from different angles, and a water mark that says US # (a number for whatever amount of dollars this note represents). Most notes contain a watermark with a picture of a historical figure.

"The soundness of a nation's currency is essential to the soundness of its economy. And to uphold our currency's soundness, it must be recognized and honored as legal tender and counterfeiting must be effectively thwarted,'' Federal Reserve Chairman Alan Greenspan said at a ceremony unveiling the $20 bill's new design. The last redesign of the U.S. dollar was in 1996.

Criticisms of U.S. banknotes

Despite the addition of color to US currency, critics hold that it will still be straightforward to counterfeit the bills. They cite that the ability to reproduce color images is well within the capabilities of modern color printers, most of which are affordable to many consumers. These critics suggest that the Federal Reserve should make use of holographic panels, such as some Australian currency and the euro banknotes do, which are much more difficult and expensive to forge.

Critics also state that bills should employ braille codes to make the currency more usable by the vision impaired, since the denominations are all the same size, and cannot be distinguished from one another non-visually.

International use of the U.S. dollar

A few nations outside of US jurisdiction use the United States dollar (USD) as their official currency. These nations include Ecuador, Palau, East Timor, Panama and the Federated States of Micronesia. Argentina used a fixed 1-1 exchange rate between the Argentine peso and the US dollar from 1991 until 2002. The exchange rate between the Hong Kong dollar and the United States dollar has also been fixed since the early 1980s, and the renminbi used by the People's Republic of China has been informally and controversially pegged against the dollar since the mid-1990s.

The dollar is also used as the standard unit of currency in international markets for commodities such as gold and oil.

At the present time, the United States dollar remains the world's foremost reserve currency, primarily held in $100 denominations. According to economist Paul Samuelson, the overseas demand for dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate and the flow of trade to readjust.

The majority of American money is actually held outside of the United States.

Origin of the name Dollar

The name for the United States dollar comes from the Spanish dollar (which itself derived from the thaler) which was the silver coin widely circulated in the United States during the time of the American Revolutionary War. Although private banks issued currency that was backed in Spanish dollars, the Federal government didn't do so until the American Civil War.

The dollar symbol

The origin of the "$" sign has been variously accounted for. Perhaps the most widely accepted explanation, according to the U.S. Bureau of Engraving and Printing, is that it is the result of the evolution of the Mexican or Spanish "P's" for pesos, or piastres, or pieces of eight. This theory, derived from a study of old manuscripts, explains that the "S," gradually came to be written over the "P," developing a close equivalent to the"$" mark. It was widely used before the adoption of the United States dollar in 1785.