A discussion on how the dollar became the world reserve currency, the history of the US Dollar. In addition, we discuss the difference between real money and fiat currency.
US Dollar History
The Continental Congress issued the first United States paper money in 1775, one year prior to the Declaration of Independence. The purpose of the money issuance was to assist with military expenses. The currency lost value. As a result, citizens of the US stopped using the currency.
On July 6, 1785 the Continental Congress officially adopted the dollar as official legal tender, beginning the official US Dollar history. The Continental Congress was a confederation of delegates who acted as representatives of citizens of the American Thirteen Colonies.
Coinage Act of 1792
On April 2, 1792, the US Congress passed the Coinage Act . The official name of the Act is, “An act establishing a mint, and regulating the Coins of the United States.”
The Coinage Act of 1792 established the US Mint and the US Dollar. The US Silver Dollar became the official unit of money for transactions in the United States. The Silver Dollar was subdivided into several denominations: one cent (penny), five cents (nickel), ten cents (dime), quarter-dollar (quarter), etc.
Silver or gold made up each coin, except for the penny. Additionally, it is significant to note that the US One-Dollar bill note did not appear until 1876. This was approximately 100 years after the US Continental Congress approved the first US currency.
During the Civil War, Dollars were called “Greenbacks.” The term was coined because the notes were colored green. In 1869, the US government established a centralized money printing system. As a result, money printed was known as United States Notes. The Greenback played an important and well-known part in US Dollar history.
During early US Dollar History, money was backed by silver and gold. It’s interesting to note that silver and gold are commodity metals that have an intrinsic value, whether in the form of a coin, a bar, jewelry, etc. More than one hundred years later in 1876, the US Government started printing currency on paper. Yet, paper money has no intrinsic or real value.
Federal Reserve Note
In the United States, currency is called “Federal Reserve Notes.” The term is equivalent to “cash” or “money.” It can also be called “banknotes.”
In fact, if you look at a Dollar Bill, it reads, “Federal Reserve Note” at the top. Next, the Federal Reserve Act of 1913, which established the Federal Reserve Bank, also authorized the issuance of the US Dollar Federal Reserve Notes. Obviously, the Federal Reserve Bank plays a critical role in the US Dollar history. Finally, banknotes are legal tender. These notes are the official currency used in the United States. In 1914, the first Federal Reserve Note was issued.
In 1913, the Federal Reserve Bank was established. At the time, existing law required the exchange of currency for gold. However, in 1933, it was illegal to own gold coins. In addition, Federal Reserve Notes were not supported by gold. Later, Americans had to use Federal Reserve Notes. There was no other option to pay debts, except to use the official currency.
Bretton Woods System
In July 1944, a gathering of over 700 delegates from around the world took place in Bretton Woods, New Hampshire. United Nations Monetary and Financial Conference was its official name. The purpose of the meeting was to improve the economy. In addition, the conference established a world banking system, including the International Monetary Fund.
World Reserve Currency
Subsequent to World War II, the United States Dollar became the official world reserve currency. As a result, a critical chapter was written on US Dollar history. This forever shaped the future of the country. The impact of this change to global finance was significant and had long-lasting impacts on both US influence and power, as well as purchasing power outside the United States. A reserve currency is one where the central banks maintain a fixed exchange rate with a particular currency and their own currencies. In this case, the US Dollar became the reserve currency. As a result, this change played a vital role in the financial stability and prosperity that Americans enjoyed in the latter 20th century.
As world reserve currency holder, the United States was required to redeem US Dollars for gold. Additionally, after World War II, the United States was one of the largest holders of gold bullion in the world. As a result, world reserve currency status for the US Dollar seemed like a natural fit. Unfortunately, in 1971, deficit spending by the US and an excess of paper money caused countries to increase the demand for gold. In response, the US Dollar history changed forever and the Dollar was no longer on the gold standard. This meant that gold would no longer back the Dollar.
Countries Using The US Dollar
“Five US Territories and seven sovereign nations use the US Dollar as their official currency.” –Investopedia
The territories include Puerto Rico, Guam, the US Virgin Islands, Northern Mariana Islands and American Samoa.
In addition, the following countries utilize the US Dollar:
British Virgin Islands and the British Turks and Caicos Islands.
Countries throughout the world that use the US Dollar as a surrogate or a proxy for their own currency include:
Panama, Zimbabwe, Cambodia, Ecuador, the Bahamas, El Salvador, Nicaragua, Timor-Leste, Micronesia, Palau, Marshall Islands, Bahamas, Barbados, St. Kitts and Nevis, Costa Rica, Belize, Myanmar, Caribbean Territories and Liberia.
It’s important to understand what fiat currency is and the difference between real money and fiat currency. Gold and silver do not act to back fiat currencies. Fiat currency is a promissory note from a government. As a result, fiat currencies frequently fall prey to high inflation, devaluation and ultimately failure. They typically have no intrinsic value. Unfortunately, most modern currencies are fiat currencies.
Why Fiat Currency is Popular?
Central Banks, such as the Federal Reserve Bank of the United States, can increase the money supply and increase fractional reserve banking by printing more fiat currency. As a result, these central banks can use the power of interest rate change and money printing to manipulate entire economies. Although the central banks have good intentions, their meddling with the economic system can wreak havoc on the economy and cause distortions in markets. Often, altering interest rates and printing money simply delays the problem, requiring bigger solutions later.
Merriam-Webster Dictionary defines “money” as,
Something generally accepted as a medium of exchange, a measure of value, or a means of payment: such as officially coined or stamped metal currency, money of account or paper money.-Merriam Webster Dictionary
Is the US Dollar real money or fiat currency?
A currency not backed by gold or silver is not real money. Unfortunately, government promises do not meet the criteria. Fiat currency is simply a legal tender paper note that the government requires everyone to use for payments. By definition, fiat currency is incontrovertible to gold or silver.
On the other hand, real money must have the backing of valuable or tangible assets. For example, tangible commodities such as gold and silver have supported currency. In addition, money backed by gold and silver has a value tied directly to the value of the silver or gold asset. As a result, real money is inherently stronger than fiat currency. As a result, it is not easily manipulated. Real money is also resistant to inflationary forces. Real money is sound money.
Future of the US Dollar
It is unclear what the future holds for the US Dollar in the long-term. The US Dollar remains as the world reserve currency; however, it’s role in this position may be for a limited time. Unfortunately, gold and silver do not support the Dollar. Yet, the strong US economy support its world reserve currency status. Financial analysts believe that so long as the US economy is strong, the US Dollar will remain strong. However, US debt and trade deficits continue to grow, putting pressure on the US monetary system.
Want to learn more about money and the Federal Reserve Banking System? Check out G. Edward Griffin’s “The Creature From Jekyll Island.”
If you want to learn about the history of money, check out Mike Maloney’s free “Hidden Secrets of Money” video series. It’s a goldmine of information that can help you better understand money and where the world stands today financially. Highly recommended!
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