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The US dollar: A history

The US dollar is the king of the world’s currencies. Here’s everything you need to know about the history of the famous greenback.

The lowdown on the US dollar

The lowdown on the US dollar

The US dollar is the world’s most used currency in international transactions and the world’s most dominant reserve currency. It’s used in several countries across the world as an official currency, as well as a de facto currency in plenty more places after that.

The iconic dollar bills are recognised the world over and you’ll hear tons of nicknames for them, from smackers to doubloons, Benjamins to clams.

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The US dollar index

The US dollar index (DXY or USDX) measures the value and performance of the US dollar against a basket of major foreign currencies that are weighted: the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%), and Swiss franc (3.6%). The USDX gives you an idea of the strength of the US dollar around the world, in comparison to these other currencies.

Started in March 1973 when the world’s biggest nations agreed to let their currencies float freely against each other, the base value was set at 100.000. This means that if the USDX reading is 85.000, the dollar’s value has fallen by 15% since the start of the index. If the value reads at 110.000, the dollar’s value has risen by 10% and is strong against the other basket currencies. If the dollar rises by 100% and doubles in value, foreign currencies will inversely lose 50% of their value.

Since its introduction, the US dollar index has been as high as 164.72 in February 1985, and as low as 70.698 in March 2008, at the time of global financial crisis. Over 2014, the US dollar index strengthened an average of 12.79% after a strong year for the US currency, finishing the year at a value of 90.28. Over 2014, foreign currencies lost an average of 11.34%, according to the US dollar Index.

As of July 24 2015, the USDX has continued to increase, putting the dollar rate today at a value of around 97.

Head to our exchange rates page to find out the latest rates on all of the world’s currencies against the US dollar.

Where does the US dollar get its name?

Ever wondered where the dollar gets its name?

Way back in the 16th century, Count Hieronymus Schlick of Bohemia began minting silver coins known as joachimstalers, named after Joachimstal, the valley where the silver was mined (in the modern day Czech Republic).

Joachimstaler was later shortened to taler and the word found its way into Danish, Swedish, Norwegian and Dutch as daler, Hungarian as tallér, Italian as tallero, and English as, you guessed it, dollar.

Where does the US dollar get its name?

Soon, all coins of a similar size and weight were known as dalers, such as the most popular coin of the time for international trade: a Dutch coin with a lion on it. This Dutch coin became known as the leeuwendaler, which translates as ‘lion dollar’. The leeuwendaler was very popular across the Dutch East Indies and in the Dutch colony of New Netherlands (now New York), soon spreading to the Thirteen Colonies during the 17th and 18th centuries, where the name caught on in English as the ‘lion dollar’. In fact, the modern day pronunciation of the word ‘dollar’ is actually still very close to the 17th century Dutch pronunciation of ‘daler’!

Of course, when Spanish pesos arrived in the US with the same shape and weight as the lion dollar, they soon garnered the nickname of ‘Spanish dollars’. These Spanish dollars became the currency of the Spanish New World by the mid-18th century and when the time came for the first official currency of the USA on September 8 1786, there was only one reasonable choice: the US dollar was born.

Silver and Gold Standards against the US dollar

The first dollar coins were issued by the United States Mint back in 1792, although if you still had some Spanish dollars or Mexican pesos laying around that was no problem: they remained legal tender until 1857.

The Coinage Act of 1792 set the US dollar exchange rate at 371.25 grains (24.056g) of silver, but gold coins weren’t given any official denomination and traded at market value relative to the silver dollar standard. In 1834, things shifted over to the gold standard at 23.2 grain (1.50g) of gold to the dollar. The Gold Standard Act of 1900 redefined the US exchange rate at 23.22 grain or 1.505g of gold, the equivalent of one troy ounce of gold being worth $20.67.

 

The Bretton Woods System and the Nixon Shock

After the Wall Street Crash of 1929, a decade of economic despair followed known as the Great Depression. The Bretton Woods System was put in place in 1944, fixing the dollar conversion to the value of gold at $35 per ounce of gold and inherently, fixing the value of the dollar to the value of gold. As the US Government’s spending increased throughout the 1960s, it began to look like the US wouldn’t be able to maintain this convertibility. The gold stocks began to shrink as a result of banks and international investors converting dollars to gold, and the value of the dollar started to fall.

With a currency crisis starting to emerge, there was a real danger that the USA wouldn’t be able to redeem dollars for gold. In 1971 President Nixon put an end to the gold standard, in a move dubbed the ‘Nixon shock’. It shook the world’s economy, making it impossible for other nations to peg their currency to the gold standard and ending the Bretton Woods system. The US’ last peg was at $44.22 per ounce of gold, after which all of the world’s major currencies including US dollars began to freely float.

 

The modern dollar

After this, the US dollar’s value wasn’t anchored to gold anymore and instead, the Federal Reserve was in charge of maintaining the value of the US currency and the dollar exchange rate. They continued to increase the money supply, seeing the dollar drop rapidly in value over the 1970s, until they tightened the money supply in the 1980s to lower inflation and stabilize the dollar.

Since 1981, the Federal Reserve have chosen to target a low, stable rate of inflation instead of zero inflation in a move known as the ‘Great Moderation’ – it’s aimed at maintaining stability of the US currency exchange rate.

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