Evolution of the U.S. Dollar

We’re used to thinking of some things as just being: that the sky is up, that the ground is beneath our feet, and that the dollar in your pocket is a symbol of a steady financial system.

But just like the unsteady political history of the country, the U.S.’s currency has had a rich history of struggle, success, and change. While the question of inflation and deflation has always affected how we value currencies, the truth is that even before the stock market, the dollar has had an interesting journey.

To understand the potential future of currencies, and how the adoption of cryptocurrencies might go, we thought it might be worth looking back on what the dollar means - and has meant - and how we’ve understood its worth.

How Did We Decide The Value of Money?

While we’re comfortable with the idea of countries having different currencies, once upon a time, there wasn’t such a thing as currency.

Instead, people would trade one thing for another. These trades could be as simple as swapping carrots for potatoes, or a meal for a specific job to be done.

Over time, people started to ‘pay’ for things not through direct exchange, but through paying tiny gold coins. Then in the 1500s, when huge amounts of silver were discovered in Germany, Austria, and the Czech Republic, silver coins became staples of trade and business.

In Europe, it became understood that x amount of something would cost y amount of coins, although bartering was common.

It was the Spanish who were responsible for spreading this around the world, using something you’ve heard of (even if you think you haven’t). Long John Silver’s Parrot talked about Pieces of Eight, or as the Spanish called it, peso de ocho.

A peso de ocho was a milled silver dollar that was understood to have a certain weight of silver within it. As the Spanish colonized various countries in South and Central America, who traded with the northern states, it became an accepted measure.

In fact, it was so accepted that throughout the 1700s, British colonists in the north would trade in pesos de ocho instead of English currency, as it was much easier to get a hold of.

The First Coinage Act

Everything continued smoothly with silver until 1776.

When the U.S. declared its independence from Britain, the Founding Fathers had to decide whether or not they were going to keep using the British pound or start something new.

They decided on something new, and so in 1792 the Coinage Act specified that one U.S. dollar was worth the same as a single Spanish milled 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 sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

... the money of account of the United States ... shall be expressed in dollars, or units ... and that all accounts in the public offices and all proceedings in the courts of the United States shall be kept and had in conformity to this regulation.

The Gold and Silver Standards

And that’s it, that’s the story of the dollar done, right?

Of course not. The problem with having coins that required a certain percentage of silver for their value is that you need to make sure you have enough silver. And by 1806, facing increasing debts from the Revolutionary War, the U.S. didn’t have enough silver to keep creating coins.

Instead, the U.S. treasury created a hard-money standard. Rather than using coins like we use money today, gold and silver were freely translated into a monetary value and back again - often with some kind of contract or visual representation that made it ‘legal tender’.

By 1857, American banks suspended payments in silver and worked exclusively with banknotes as a way to get some much needed economic stability through controlling the production of notes. This change in how the value was perceived went from something concrete to something government-controlled.

The Coinage Act of 1873 returned the U.S. to a country that backed the value of its money through gold and demonetized silver altogether. This wasn’t without its conflicts.

Essentially overnight, western silver mining interests and those who owned huge shares of silver saw the value of gold dramatically overtake the value of silver. It was so controversial that the Coinage Act was called the “Crime of 73”.

The Bland-Allison Act

For five years, it seemed like gold had won the battle of the metals, until the passing of the Bland-Allison Act in 1878.

The Bland-Allison required the U.S. Treasury to buy silver bullion so it could be minted into coins that would exist alongside the gold coins.

This became known as Bimetallism and would last until 1900 and the passage of the Gold Standard Act (another attempt to standardize the worth of a dollar against gold).

The Bland-Allison Act turned the U.S. into a gold standard country, although also allowed for gold and silver to serve as legal tender.

As with most things to do with money, for as long as the U.S. wasn’t actively involved in any war, it could enjoy the stability of a gold standard without restriction on importing or exporting.

However, over the horizon was a world war that was already wreaking havoc in Europe.

All countries that were fighting in the war were having to give up their gold standards in order to be able to keep the financial control of their countries.

So when the U.S. joined World War I, President Wilson banned the export of gold, which ended the ability to use the gold standard for foreign exchange. The hope was that, after the war, countries would be able to return to the gold standard practice.

However, during the Great Depression, every country was forced to think again.

The Bank of England led the way in leaving the gold standard in 1931 when speculators tried to exchange gold for currency notes or to settle debts - which threatened the solvency of the British banking system.

This pattern repeated itself throughout Europe and North America, with the Federal Reserve having to raise interest rates in order to protect the gold standard for the U.S. dollar - and making the depression slightly worse.

Through 1933, people started to actively mistrust banks and paper money, thereby rendering the money worthless. This resistance to bank money led to people hoarding gold coins, which worsened deflation and hit reserves of gold hard.

Without a doubt, something needed to be done. The question was: what, and how?

Bretton Woods

The Bretton Woods system was a deal brought together by the U.S., Canada, Western Europe, Australia, and Japan, as the world attempted to regroup after World War II.

The main feature of the system was that each country that took part in the system maintained its exchange rates within 1% by tying its currency to gold. This was seen as being the best possible way to keep currencies afloat and allow stability to happen again.

As a direct result of Bretton Woods, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were founded. While a reasonable idea, there was active tension between some of the countries.

At the time, the U.S. had around two-thirds of the world’s gold and insisted that the value of money should be connected to the value of both gold AND the U.S. dollar.

This made Soviet representatives uncomfortable, who claimed that this was just a push for U.S. Imperialism.

A Silvery End

The beginning of money as we know it started to kick in in the early 1960s. This is the last time that silver certificates were issued and honored - by 1968, President Nixon unleashed what would become known as the “Nixon Shock”.

In an attempt to fight rising inflation and stabilize the economy, Nixon wanted to separate the idea of currency from outside sources of value. A dollar was worth a dollar, and gold or silver could not be used in replacement for this.

While Nixon may have had honorable intent, his actions in 68 effectively ended the Bretton Woods agreement, as the U.S. entered a time where money has its own value, separate from anything else.

This is known as a fiat currency and is typically how we understand the value of money today.

What does the future hold?

As you can see from our brief jaunt through history, currency and the value of money has been far from a stable proposition. From depressions to world wars, laws changed and were bent around what was profitable, sustainable, and politically viable.

When we think about a dollar now, we’re thinking about a concept rather than a concrete thing. It’s not a surprise that in the forty years since the end of Bretton Woods, new currencies are emerging.

When we’re not comparing currency to gold, but simply to itself, the world of currencies becomes ripe for possibility.

Will we one day look back on the evolution of the cryptocurrency as the next stage in the evolution of the U.S. dollar?