United States Dollar (USD)

The official currency of the United States (United States of America)

For decades, the USD, or United States Dollar, has been the primary and most traded currency in the forex market. The US dollar is also a buck, green, dough, scrillas, etc. It is the official currency of the United States (United States of America).

It is managed by the Federal Reserve Bank of the United States. Despite its association with the United States, USD is the official currency of multiple other countries, including Panama and Ecuador.

It is the primary currency of the United States of America, represented by the symbol '$,' according to the USD definition. 

The three-letter abbreviation for the US dollar is USD.

The US dollar was once backed by gold but has since become a free-floating fiat currency.

In the international foreign exchange market, the USD is the most traded currency, with the EUR/USD being the most active currency pair. The US dollar accounts for nearly 90% of all foreign exchange transactions.

Understanding the United States Dollar

In 1785, the United States made the USD the primary unit of currency. The Coinage Act established the first US Mint and the Federal Monetary System in 1792. The value of the coins in copper, silver, or gold was also used to determine their denomination.

After the United States Treasury issued non-interest demand bills in 1861, the first $10 demand bill with Abraham Lincoln appeared in circulation.

In 1863, the national banking system and specific guidelines for all national banks were established. These national banks now had the authority to issue national currency. Furthermore, the first $10 Federal notes were published in 1914.

The United States dollar was designated the world's currency for the first time in the 1944 Bretton Woods Agreement and is estimated to be the world's most powerful currency.  

It supports the world's largest economy, the United States. The strength of the US economy majorly supports the dollar's use as a global currency. 

The phrase "US dollar" refers to a specific denomination and US currency. It was first traded as a coin worth its face value in silver or gold and then as a paper note redeemable in gold. 

The gold standard was abandoned in the 1970s, and the dollar's value was allowed to float. Although gold's value fluctuates daily, it is still in high demand today.

Following World War I, the United States dollar became an important international reserve currency, eventually displacing the pound sterling as the world's primary reserve currency by the Bretton Woods Agreement near the end of World War II. 

The dollar is the most commonly used currency in international transactions and is a free-floating currency. It is also the official currency of several countries and the de facto currency of many others with Federal Reserve Notes (and, in some cases, US coins) in circulation.

The dollar symbol ($) is said to have been derived from the previously used ps, which represented the Mexican peso, Spanish piaster, or "eight pieces." 

People eventually began to write the letter 'P' over the letter 'S,' then a single line over the letter 'S,' resulting in the dollar symbol.

The enigmatic symbols on the United States dollar bill have sparked considerable debate. For example, the arrows held by the eagle on the dollar bill were initially held in the right talon. Arrows represent war, and the right side represents dominance. 

Some interpreted this to mean military dominance. The Founding Fathers used these symbols to convey powerful messages, but they have become cluttered over time. 

One dollar can be divided into hundred cents. These dollars, which feature the president's portrait on the front, are available in denominations of $1, $2, $5, $10, $20, $50, and $100. It is critical to understand that the $100 bill only contains a portrait of Benjamin Franklin. 

Until 1969, banks issued $500 and $1000 bills, which were later discontinued. The Treasury Department is in charge of the production of banknotes and coins. These are then delivered to America's central bank, the Federal Reserve, for further circulation and distribution.

Descriptions

The Great Shield of the United States is depicted on the dollar bill, and it includes:

  • The American eagle flies free, holding 13 war arrows in its non-dominant left talon and an olive branch in its dominant right talon.

  • The banner in its beak says "E Pluribus Unum," which translates to "Out of Many, One."

  • The horizontal blue band on the shield represents Congress uniting the original 13 colonies, represented by 13 red and white vertical stripes.

  • The 13 stars above the eagle each represent a new country or constellation in the universe.

  • Red represents bravery, white represents purity, and blue represents justice.

On the reverse of the Great Seal, an unfinished 13-row pyramid represents strength and endurance.

As of February 10, 2021, there was $2.10 trillion in circulation, $2.05 trillion of which was in Federal Reserve Notes (the remaining $50 billion was in coins and older-style United States Notes).

United States Coins

There are six coin denominations produced, with the following production costs:

  • Penny (one cent): In 2019, pennies cost taxpayers approximately $68 million.

  • Nickel (5 cents): Nickels add approximately $21 million to the US debt.

  • Dime (worth 10 cents): Dimes are produced for only 3.7 cents each.

  • A quarter (worth 25 cents) costs 9 cents to produce and distribute.

  • A half dollar (worth 50 cents) costs approximately 6.6 cents to produce.

  • The United States is the only developed country that still uses $1 bills (worth 100 cents).

  • The half-cent coin, two-cent coin, three-cent coin, half-dime coin (different from the nickel), and twenty-cent coin are no longer produced in the United States.

American currency

As the nation's central bank, the Federal Reserve is responsible for ensuring enough currency in circulation. The bills are printed by the Bureau of Engraving and Printing of the United States Treasury Department. 

It also gives its Mint Department permission to cast the coins. When the currency is created, it is delivered to Federal Reserve banks, where members can exchange credit for currency as needed.

Dollar value

Aside from exchange rates, the dollar value is determined by US Treasury notes and the number of dollars held in reserves by foreign governments. Countries that export more to the United States than they import hold an excess of dollars, which raises the dollar's value by absorbing the excess supply. 

This exchange also lowers the value of their currency, making their goods appear cheaper. In addition to holding dollars, these countries buy Treasury notes, further strengthening the dollar.

The dollar's strength stems partly from its status as the world's reserve currency. People tend to accept a $20 bill instead of their currency worldwide because of its supremacy; most oil contracts are in dollars and 86 percent of all foreign exchange trades are in dollars. 

The Bretton Woods Agreement, which agreed to peg their currencies to the dollar and tie them to a fixed amount of gold, is responsible for the dollar's unique status as a world currency. President Nixon abolished the gold standard in 1973, allowing the dollar to have a floating rather than a fixed value.

The emergence of a reserve currency

In 1946, John Maynard Keynes and Harry Dexter White attended the first meeting of the International Monetary Fund. They were instrumental in developing the postwar global financial system's provisions.

The United States dollar first emerged as an essential international reserve currency in the 1920s, displacing the British pound sterling as it emerged relatively unscathed from World War I and as a significant recipient of wartime gold inflows. 

Following the United States emergence as a stronger global superpower during WWII, the Bretton Woods Agreement of 1944 established the United States dollar as the world's primary reserve currency and the only postwar currency linked to gold.

The Bretton Woods Agreement of 1944 defined the post-World War II monetary order and relations among modern-day independent states by establishing a system of rules, institutions, and procedures to regulate the international monetary system. 

The agreement established the International Monetary Fund and other modern-day World Bank Group institutions, laying the groundwork for international payments and access to global capital markets using the US dollar.

The Federal Reserve System, which serves as the country's central bank, manages the country's monetary policy, which was established in 1913 under the Federal Reserve Act to provide an elastic currency for the United States and to supervise its banking system, especially in the aftermath of the Panic of 1907.

History

The history of the United States dollar began with efforts by the United States of America's Founding Fathers to establish a national currency based on the Spanish silver dollar, which had been in use in the United Kingdom's North American colonies for over 100 years before the United States Declaration of Independence

The Coinage Act of 1792, passed by the new Congress, established the United States dollar as the country's standard unit of money and the United States Mint, tasked with producing and circulating coinage. 

Initially defined as a fixed quantity of silver or gold, it formally adopted the gold standard in 1900 and finally eliminated all ties to gold in 1971.

The United States Mint began manufacturing the US dollar in 1792 as a local version of the popular Spanish dollar or piece of eight produced in Spanish America and widely circulated throughout the Americans from the 16th to the 19th centuries. 

The Spanish, United States, and Mexican silver dollars circulated alongside each other in the United States. The Spanish dollar and Mexican peso remained legal tender until the Coinage Act of 1857.

The United States had acquired large gold reserves due to their gold reserves and borrowing to pay for war materials. The gold reserves had provided the United States with significant political and economic power after the war. 

The Bretton Woods agreement codified the dollar's postwar economic dominance. In 1944, the Allies sought to establish an international monetary order to sustain the global economy and prevent the economic malaise that followed World War I

The Bretton Woods agreement established international monetary order, establishing rules and expectations for the global economic system. 

It established the International Monetary Fund (IMF), the World Bank's predecessor, and an international monetary system based on fixed exchange rates.

The dollar was valued at $35 per ounce of gold, and the remaining signatories pegged their currencies to the dollar, leading some economists to argue that Bretton Woods "dethroned" gold as the default asset. 

While Bretton Woods established the dollar's importance after the war, Europe and Asia experienced dollar shortages. The international community required dollars to finance imports from the United States to rebuild what had been destroyed during the war. 

Appreciation

In 1948, Congress passed the European Recovery Program, also known as the Marshall Plan, which provided funds to European countries to help them rebuild their economies.

In the International Monetary Fund's Special Drawing Rights currency basket, the US dollar is joined by the world's other major currencies - the euro, pound sterling, Japanese yen, and Chinese renminbi. 

Central banks worldwide have massive reserves of US dollars and are significant buyers of US treasury bills and notes. 

Foreign companies, entities, and private individuals hold US dollars in foreign deposit accounts known as eurodollars (not to be confused with the euro), which are not subject to the Federal Reserve System's jurisdiction. 

Private individuals also hold dollars outside the banking system, primarily in the form of $100 bills, with 75 percent of their supply held abroad.

The US Department of the Treasury has significant oversight over the SWIFT financial transfers network and, as a result, has enormous sway over global financial transaction systems, with the ability to impose sanctions on foreign entities and individuals.

Economists Paul Samuelson and others (including, at the time of his death, Milton Friedman) have argued that the United States can run persistent trade deficits without causing the currency's value to fall or the trade flow to shift. 

However, Samuelson predicted in 2005 that these pressures would precipitate a run against the US dollar, with severe global financial consequences.

Free DCF Crash Course

Sign Up for our Free DCF Modeling Crash Course

Begin your journey into financial modeling with our free DCF Modeling Crash Course.

Learn More

Research and authored by Khadeeja C Abbas  | LinkedIn

Reviewed and Edited by Abhijeet Avhale | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: