The US dollar is by far the most recognized currency in the world. Today it serves as the de-facto reserve currency since Richard Nixon closed the gold window in 1971.
During colonial times the United States used the pound sterling, Spanish dollar and Mexican peso, along with many local currencies issued by the original thirteen colonies.
In the run-up to the revolutionary war, the Continental was issued as a currency by the newly declared independent United States of America. The currency was needed especially to cover the costs of the uprising against the English crown, and promptly lost most of its value, giving birth to the phrase not worth a Continental.
The Constitution specifically endows the Federal Government with the authority to coin money. The dollar was born in The Coinage Act of 1792 by which the US Mint was established and the US dollar was defined to be equivalent to one Mexican peso and to contain 27 grams of silver. The Coinage Act also established the gold eagle with a denomination of ten dollars and a gold weight of 17 grams, or 1.7 grams per dollar unit. This value was revised down to 1.5 grams in 1834. The Mexican peso was derived from the Spanish dollar and these two currencies along with the new silver dollar were legal tender and circulated freely in the United States until 1857.
The purity of both silver dollars and gold eagles was defined as .900 fine, or 90% pure silver and gold, respectively. The silver dollar traded at a slight discount with respect to the Spanish dollar, given that it was defined as 371 grains whereas the Spanish dollar was minted with 377 grains of silver. Thus, the dollar equivalent in gold to the pound sterling was £1=$4.86 as opposed to the Spanish dollar’s £1=$4.80.
The stability provided by a precious metals-based currency was enjoyed in the U.S. throughout the nineteenth century, as the relative value of goods and services fluctuated in dollar terms according to the inflows and outflows of gold and silver to and from the United States. However, the relative stability of the money supply during the 100 years after its introduction caused the cost of goods and services to drop over time in dollar terms. In the modern fiat money economy, this would be termed as deflation. During the nineteenth century, it was precisely this “deflation” that spurred savings and investment, and was one of the principal reasons why the United States was able to transform itself from an agrarian economy into an industrial superpower in less than 100 years.
The first currency intervention by the federal government was at the hands of president Lincoln in 1862. Facing mounting costs from the civil war, Lincoln was forced to issue paper currency without the backing of precious metals. The dollar was sharply devalued during this period, and it wasn’t until 1878 that the United States returned to a gold standard backing up its paper currency, and the dollar was able to re-valuate to pre-war levels by the turn of the century.
Just as the dollar was regaining its traditional purchasing power, The Gold Standard Act of 1900 was enforced, fixing the exchange rate between gold and the dollar at $20 per troy ounce and giving private banks more leeway in artificial credit expansion (i.e. issuing credit without sufficient gold reserves to back up the loans). The Federal Reserve system was instituted in 1913, in which a collection of private banks were given almost complete control over the money supply, under the oversight of the Federal Reserve Chairman, appointed by the president of the United States. Although the dollar continued to be backed by gold, its value was steadily eroded due to excessive bank credit. With Executive Order 6102, issued by FDR in 1933, the exchange rate with gold was changed to $35 per troy ounce, further debasing the currency, and the possession or use of gold currency was prohibited. After World War II the gold standard was replaced by a worldwide dollar standard, in which the dollar served as the world reserve currency backed by gold at $35 per ounce. However, rising government expenditures in the decades to come put pressure on the dollar’s peg to gold, and doubts surfaced over whether the US would be able to maintain the backing of the dollar with gold. Between 1968 and 1971 a series of adjustments were made to the exchange rate and the gold price was $42.22 per troy ounce when the dollar was floated by Nixon, effectively ending the Bretton Woods accord and converting the dollar into a pure fiat currency, backed by nothing.
The price of gold promptly shot up on the open market as the dollar was debased by the Federal Reserve to stimulate the economy. In 1980 the gold price in US dollars had risen to $850. In 1999 gold bottomed out at $250 per ounce. In 2011 gold managed to break the $1,900 plateau briefly.
The United States claims to possess 8,133 tonnes of gold reserves, representing 74.7% of total foreign reserves.
Bullion coins issued in the United States that are popular today with gold and silver investorsinclude the following:
- Flowing Hair Silver Dollar
- Silver nickels, dimes, quarters and half-dollars (commonly referred to as junk silver)
- Half Eagle ($5 gold coin)
- Eagle ($10 gold coin)
- Double Eagle ($20 gold coin)
The US Mint currently issues a variety of bullion coins, the most popular being the one ounce gold American eagles, gold American buffaloes, and silver American eagles.