May 30, 2024

The US dollar, historically one of the most influential currencies in the world economy, has a history spanning more than two centuries. It has transitioned from a simple unit of account to a global reserve asset, reflecting economic and political changes not only in the country but also globally. Understanding the past and present of the dollar helps traders analyse current market trends, predict their development, evaluate the strength of the "Greenbacks," and make informed trading decisions. So, where did the dollar come from and how did it become what it is today?

18th Century: The Dollar at the Dawn of US Independence

The history of the US dollar in the 18th century is closely linked to the economic development and political changes of the young American nation. It all started even before the official declaration of the country's independence, encompassing several key stages and events.

The origin of the word "dollar" can be traced back to the early years of New York's existence. In the 17th century, New York was a Dutch settlement called New Amsterdam, and the primary currency there was the "leeuwendaler" (Dutch coins featuring a lion). The shortened form of the word "daler" became widely used, not only for Dutch currency but also for many others.

It is worth noting that before the creation of a unified American currency, various American colonies used diverse forms of money, including British pounds, Spanish doubloons, and commodity money such as tobacco or corn. Like the government itself, the first truly American money appeared during the War of Independence (1775-1783), when the Continental Congress passed the first official laws for its circulation in 1776.

A significant problem at that time was the shortage of coins. As a result, the Second Continental Congress issued Continental dollars – paper money to finance military expenses. These notes were not backed by gold or silver, leading to their depreciation and inflation. The phrase "not worth a Continental dollar" originated during this period due to the mass loss of public trust in such money.

A key moment in the dollar's history was the adoption of the Coinage Act of 1792, which officially established the US monetary system. The act designated the dollar as the unit of the monetary system and provided for the creation of the first American mint. The dollar was defined as containing 371.25 grains (24.057 grams) of pure silver, inspired by the popular Spanish silver peso (also known as the "Spanish dollar").

Alexander Hamilton (1755/1757–1804), the first US Treasury Secretary, proposed a plan to create a national bank. The goal was to support a healthy economy, currency stability, and federal management of state debts. Hamilton's ideas and reforms played a crucial role in establishing the dollar as the national currency, contributing to financial stability and trust in the new money.

By the end of the 18th century, the dollar had begun to be widely used in domestic transactions and was gradually recognized on the international stage. A significant step was the establishment of several mints across the US, ensuring the minting of coins to a unified standard. This strengthened the dollar's role as the foundation of the American economic system, helping solve many economic and financial problems of the young nation, ensuring future economic development, and laying the groundwork for the dollar's future status as the leading global currency.

History of the US Dollar: From Inception to Global Dominance1

19th Century: The Rocky Road to Recognition

In the early 19th century, European currencies such as the British pound sterling dominated the world financial system, being the most stable currency for international trade and financial reserves. The dollar's role on the world stage was barely noticeable. It began to gain strength and respect only in the middle of the century when industrial development in the US and the expansion of the American economy paved the way for its recognition.

From the enactment of the Coinage Act in 1792 until the start of the American Civil War (1861-1865), the federal government did not issue banknotes. The issuance of paper money was left to individual states and private banks. The situation became even more complicated with the emergence of new independent states. One can only imagine the chaos caused by the endless variety of banknotes of various sizes and designs. Banks had to create catalogues with samples of bills and, for safety, exchanged foreign banknotes at a discount. For example, a $5 bill from the Agricultural Bank of Tennessee might be worth only $4 in New York.

But the confusion didn't stop there; it only intensified when counterfeiters and fraudsters joined in printing money. Since any bank in any state could print its own money, some started opening so-called "Wildcat banks" in remote areas, especially in the Wild West, where they introduced their own currency. If such a bank went bankrupt or disappeared along with its owner, its dollars turned into worthless paper.

The situation began to improve gradually after the Civil War, which significantly impacted the country's economy and financial system. During the war, the government issued paper money known as "Greenbacks" – treasury notes in denominations of 1, 2, 5, 10, 20, 50, 100, 500, 1000, and 10000 dollars that could not be exchanged for precious metal. These banknotes got their name "Greenbacks" because their reverse side was green. The issuance of paper money temporarily reduced dependence on gold and silver and strengthened the role of the federal government in the economy. However, their excessive printing during economic turmoil led to significant depreciation of Greenbacks. In 1864, a paper dollar was worth less than 40 cents in silver.

After the Civil War, the 1875 Specie Payment Resumption Act required the government to redeem paper money and exchange it for gold, strengthening confidence in the dollar as a reliable and stable currency.

Late 19th Century: The Beginning of Global Expansion

The Industrial Revolution in the US, which began in the second half of the 19th century, significantly strengthened the country's economic position. The development of railway transport, the steel industry, and mass production contributed to the growth of national wealth and the increased circulation of the dollar both domestically and internationally. A vast banking system was created in the US, ensuring the stable circulation of national currency, providing loans, and financing large industrial projects.

During this time, the US began to participate actively in international treaties and conferences, such as the International Monetary Conference of 1878, where issues of currency standardization and trade were discussed. The law passed in the same year regulated the issuance of Greenbacks, helping the dollar gain trust and recognition internationally. The American currency began to be used more actively outside the country in international settlements, facilitated by the export of goods from the US, such as cotton, tobacco, and wheat, as well as American investments, loans, and financial support abroad. The US used the dollar as a tool of financial diplomacy, aiming to expand its influence in various regions, primarily in Latin America.

All these measures strengthened the dollar, making it more accessible and convenient for use both nationally and internationally. By the turn of the 20th century, the dollar had transformed from a young and unstable currency a century ago into a significant element of the world economy. It symbolized the growing economic and political influence of the United States, and its stability and reliability helped strengthen confidence in the American financial system globally. These processes laid the foundation for the dollar's future dominance in the world economy, which was firmly established in the 20th century.

First Half of the 20th Century: Through Wars and Crises to Global Dominance

In the first half of the 20th century, the US dollar underwent significant changes and challenges, becoming the world's leading currency. This period was marked by several global events, including World War I, the Great Depression, and World War II. During World War I (1914-1918), the US became the largest creditor and supplier of resources for the Allied Powers (the Russian Empire, Great Britain, and France). Before entering the war in 1917, the US actively traded and provided loans to allies, leading to a significant influx of gold and strengthening the dollar. This war helped the dollar begin its process of becoming a world currency as Europe weakened and the US economically strengthened.

After the war (1918-1929), the United States used its economic dominance to further promote the dollar. The establishment of various financial institutions and participation in international financial conferences facilitated its integration into the global economy. However, the 1929 stock market crash and the subsequent Great Depression (1929-1939) severely undermined the US economy. In response to the economic downturn, President Franklin Roosevelt implemented a series of measures known as the "New Deal," including abandoning the gold standard in 1933, which allowed for an increase in the money supply and economic stimulation. These measures helped stabilize the dollar and laid the groundwork for its further strengthening.

During World War II (1939-1945), the US once again became the main economic engine, as most European countries were devastated. About a year before the war's end, from July 1 to 22, 1944, the Bretton Woods Conference, officially known as the United Nations Monetary and Financial Conference, took place. This event laid the foundations for the post-war world economy and financial system. The conference brought together 730 delegates from 44 Allied countries at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA. The main goal was to create a stable economic environment that would prevent the recurrence of economic catastrophes like the Great Depression of the 1930s. The primary goals and achievements of the conference were:

- Stabilization of exchange rates: To prevent competitive devaluations and tariff wars that exacerbated the Great Depression, a system of fixed but adjustable exchange rates was created. The dollar became the world's primary reserve currency, and all major currencies were pegged to the Greenback, which was exchangeable for gold at a fixed rate of $35 per ounce.

- Creation of the International Monetary Fund (IMF): The IMF was established to oversee the currency system, provide short-term loans to countries to maintain their exchange rates, and help resolve balance of payments issues.

- Creation of the International Bank for Reconstruction and Development (IBRD or World Bank): The World Bank was founded to provide long-term capital to countries needing reconstruction and development after the war. The main goal was to finance projects that promoted economic growth and improved living standards.

Among the important consequences of this conference was the promotion of international trade and investment, providing a stable currency environment necessary after the chaotic and destabilizing 1930s. Another result was the strengthening of the US dollar. The dollar, along with gold, became the de facto foundation of the world currency system, leading to increased economic and political influence of the United States on the international stage.

Second Half of the 20th Century: The "Nixon Shock" and Its Consequences

Although the Bretton Woods system contributed to economic prosperity and stability in the first post-war decades, it began to crumble in the 1960s due to various political and economic issues. Finally, in 1971, US President Richard Nixon announced the suspension of the dollar's convertibility into gold. This event became known as the "Nixon Shock," and its consequences included:

- Transition to floating exchange rates: Immediately after the suspension of the dollar's convertibility into gold, major world currencies shifted to a floating exchange rate system. This allowed exchange rates to fluctuate based on market conditions without a direct peg to the dollar or gold.

- Increased volatility in currency markets: The floating exchange rate system led to increased volatility in currency markets, as exchange rates now depended on a wide range of economic indicators and speculative market sentiments.

- Enhanced role of central banks: Central banks gained more power and responsibility for managing national currencies in a more complex and dynamic global financial environment.

Despite the collapse of the Bretton Woods system, it laid the foundation for the modern international financial architecture and contributed to the creation of the IMF and the World Bank, which continue to play key roles in the global economy. Additionally, the experience of the Bretton Woods system highlighted the importance of international economic policy coordination and the impact of global financial structures on the economic development of individual countries. Even after the "Nixon Shock," the Greenback maintained its position, and in the late 20th and early 21st centuries, it remained the primary reserve currency and the main tool for international trade and finance.

21st Century: New Crises, New Challenges

In the 21st century, although the dollar continues to play a key role in the world economy, it increasingly faces new challenges and changes reflecting a more complex and globalized financial world. The economic boom of the 2000s was interrupted by the global financial crisis of 2008, leading to a deep recession and the need for large-scale government interventions. The US Federal Reserve (Fed) had to lower interest rates and began a quantitative easing (QE) program to support the economy.

In 2020, the COVID-19 pandemic caused another economic crisis. The US again responded with aggressive fiscal and monetary policies, including stimulus funding and further quantitative easing. These measures helped support the economy but simultaneously increased government debt and led to rising inflation. After the pandemic subsided and the US economy demonstrated its resilience even under the most challenging conditions, the US central bank began gradually normalizing its monetary policy.

To this day, dollar assets are considered the most reliable means of savings, so most international currency reserves are held in US dollars, ensuring high demand for Greenbacks. Oil prices and other major commodities are traditionally denominated in dollars, and most international trade and financial transactions are still conducted in this currency.

However, it cannot be said that the dollar can rest on its laurels. In recent years, competition from other currencies, such as the euro and the Chinese yuan, has intensified. China actively promotes the yuan as an international currency, signing swap agreements with other countries and expanding the use of the yuan in international settlements. The emergence of cryptocurrencies and interest in central bank digital currencies (CBDCs) presents another challenge to the dollar's dominance. The increasing US government debt also raises concerns about the long-term sustainability of the American currency and could lead to a decline in confidence in it. Therefore, in the face of global economic changes and challenges, the dollar's resilience and adaptability will be critically important for maintaining its dominant position in the future.

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