Philosopher Ayn Rand once pointed out that it was Americans who coined the phrase “to make money.” Rather than seeing wealth as something looted or distributed, Rand conceived of it as being earned and produced. In America, the embodiment of financial wealth is the US dollar, also known as ‘the buck’ and ‘the greenback’. It seems fitting, then, to reflect on the origins of the dollar – both where it came from and how it evolved into the fiat currency that it is today.
Contrary to general assumptions, the dollar existed before the United States was an independent and unified nation. Prior to the Declaration of Independence, the Continental Congress had authorized the government to issue dollars and coins for use as widely accepted tender amongst the thirteen British colonies. The term “dollar” itself actually owes to Spanish currency of the time, specifically the eight-real coin (also known as the Spanish dollar), and U.S. dollars were used side by side with their Spanish counterparts – which were accepted as legal tender until 1857 – during colonial times. In fact, the dollar wasn’t the only monetary system vying for widespread use in colonial America. In the Dutch New Netherland (New York) colony, for example, the lion dollar was the currency of choice. However, the U.S. dollar began separating itself from the pack following a Congressional resolution on August 8, 1786.
It was Alexander Hamilton’s leadership at the treasury department, however, which truly cemented the dollar’s status as the basic unit of account in the U.S. with the passage of the Coinage Act of 1792. The act mandated that a “dollar” be between 371 and 416 grains of silver and an “eagle” be between 247 and 270 grains of gold. (An eagle was said to be with 10 dollars, and a dollar worth one-tenth of an eagle.) Here, again, we see the influence of Spanish dollars on the fledgling American currency, as Hamilton based these silver and gold weights on the average weight of worn Spanish dollars. This act also commissioned the opening of a mint in Philadelphia, then the capital of the nascent country. Incidentally, the mint was the first federal building opened with authority from the United States Constitution.
Interestingly, the practice of putting presidents on the front of U.S. dollars is a rather modern tradition, beginning only in the early 1900’s. George Washington, the president most readily identified with the dollar, scoffed at the idea of using his face on money. To Washington, the very notion smacked of European monarchical tradition. As for the ubiquitous dollar sign ($), various theories have been proposed to explain its emergence. Rand, for instance, claimed that the dollar sign represented “U” and “S” superimposed, although this theory is questionable because the dollar sign predates the formation of the U.S. as an independent nation. Other theories reference the coat of arms found on Spanish colonial currency or suggest that it is nothing but an evolved scribal abbreviation for Spanish and Mexican pesos. The latter is perhaps the most widely believed, but historians remain divided on the exact origin.
The Gold Standard
Realizing that pieces of paper had no intrinsic value (and the inflationary dangers this posed) the U.S. government eventually put the dollar on what is known as a gold standard. Essentially, this meant that every dollar in circulation was “backed” by a certain amount of gold that citizens could demand in exchange for their dollars. The gold standard became law in 1900 with the passage of the Gold Standard Act, which aimed to, “…define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes”, according to HistoryCentral.com. Specifically, the Act mandated that each dollar in circulation be valued at $20.67 per ounce of gold. Under such a system, the treasury could not simply print money on whim, but only when and if there were sufficient gold reserves. While the gold standard did indeed restrain inflation and promote sound monetary policy, it proved incapable of adapting to changing circumstances like wars and recessions. The standard was suspended twice during World War 1, for example, because European entities began owing by U.S. corporations in the form of gold. Thus began a massive gold outflow that continued unabated until the New York Stock Exchanged closed in 1914 and the gold standard was put on hold. To its credit, the U.S. restored the gold standard when the NYSE re-opened in December of that year, making the U.S. the only nation in the world to maintain its gold standard by that time.
It was not to last, however. When the Great Depression set in, currency speculators began demanding gold in exchange for their dollars en masse. While the Federal Reserve raised interest rates in an attempt to protect the gold standard, bank runs persisted throughout the early 1930’s. Finally, in 1933, President Franklin Delano Roosevelt suspended the standard and revoked gold as universal legal tender for debts. Interestingly, even this suspension was considered to be temporary at the time – it was only the growing chaos of the depression which kept the restoration of the gold standard permanently on the back burner in terms of political importance. Nevertheless, the U.S. dollar’s relationship to gold grew more and more tenuous over the years.
The Fiat Standard
The dollars we all use today operate independently of gold prices or any precious metals of intrinsic value. This is known as “fiat currency” – that is, the dollar’s value is only that which we collectively ascribe to it. Insofar as we value, accept and seek dollars as compensation, they have and will continue to have value. Transformation of the U.S. dollar into a fiat currency began in earnest in 1963, when the words “payable to bearer on demand” were left out of all newly printed Federal Reserve notes. Holders of pre-1963 currency could still redeem it for gold until 1968, when redemption was discontinued. Additionally, 1965’s Coinage Act stopped the practice of using silver in quarters and dimes, which were composed 90% of silver prior. In sum, this means that all of the roughly $829 billion worth of U.S. currency estimated to be in worldwide circulation in 2007 is redeemable for and intrinsically worth precisely nothing. The “real” value of U.S. currency begins and ends with the value of the paper it is printed on.
Despite being a fiat currency, the U.S. dollar serves as a sort of barometer for the health of the world’s financial system. Today, entire countries (such as Panama, the British Virgin Islands and El Salvador) peg their currency to the dollar just as the U.S. once pegged the dollar to gold; others go so far as using dollars in lieu of – or alongside – their own currencies. Evidently, the fact that the the dollar is backed by nothing but “the full faith and credit of the United States government” is convincing enough for our citizens and the rest of the world. Whether faith in the dollar will withstand unprecedented debt spending and a shaky world economy, however, is a question yet to be answered.