The Dollar

The monetary unit of the United States of America is called the dollar. The first dollar standard originated in 1775 when the Continental Congress issued paper notes denominated in dollars.

Money is any commodity, token, or financial instrument that serves as the unit of account, the medium of exchange, and the store of value in a particular social context.

Medium of exchange means money is used to settle debts and purchase goods. Unit of account means debts and prices are specified in terms of the monetary unit. Store of value means money is stored up, held, or saved to repay debts or to purchase goods in the future.

Legal tender laws are statutes that specify the money which must be accepted in payment for satisfaction of debts or sale of goods in commerce. However a creditor or seller can negotiate for an alternative means of payment in the express terms of a contract. If alternative payment terms are not specified in an agreement then the creditor or seller must accept payment in legal tender money. However, an exception applies if a creditor or seller rejects a payment offer of legal tender that is not reasonable in a given context. Payment of legal tender must be reasonable in context.

Monetary tokens circulate as metalic coins and paper notes. Symbols are engraved or printed on each monetary token to indicate a quantity of money in terms of the monetary unit. Fiat money refers to monetary tokens that have little or no commodity value. A gold standard, silver standard, or bimetalic standard refers to the definition of the monetary unit in terms of standard quantities of gold, silver, or both gold and silver. Gold and silver coins are monetary tokens made with precious metals that also have significant commodity value.

The following table indicates the historic period and the official tokens that served as the dollar standard during each period.

The Dollar - Official Tokens

1775-1791 Continental dollar notes.

1792-1834 Silver and gold dollar coins.

1834-1862 Gold and silver dollar coins.

1862-1879 Greenback dollar notes.

1879-1933 Gold dollar coins.

1934-1963 Federal Reserve Notes (FRNs) and silver coins.

1964-NOW Federal Reserve Notes (FRNs) and base metal coins.

During the period 1775-1791 the Continental Congress issued paper Continental dollar notes to finance government operations including the war for independence fought against Great Britain. In this system the float of Continental dollars increases via federal deficit spending and decreases via net receipts under a federal budget surplus. Price inflation was driven by large government deficits, by significant counterfeiting of Contintental dollars, and by general shortages of many resources in the colonial economy. Note the federal deficit tends to stimulate economic activity, to increase the float of financial savings, and to contribute to inflation if aggregate demand exceeds supply.

During the period 1792-1862 the United States Congress legislated a bimetalic standard which defined the dollar in terms of gold and silver. Domestic and international standard ratios of silver to gold did not match over this period. Silver coins dominated domestic circulation from 1792-1834. Gold coins dominated domestic circulation from 1834-1862.

During the period 1862-1879 the federal government issued greenback paper notes to finance operations including efforts to fight the Civil War. Price inflation was driven by large government deficits and general shortages of resources during and after the war.

During the period 1879-1933 Congress legislated a true gold standard by defining the dollar only in terms of gold. Gold coins circulated domestically during this entire period. However the fractional dollar coins were minted using silver and copper.

The Federal Reserve Act of 1913 established the Federal Reserve System (Fed) as the central bank of the United States to provide the nation with a lower risk, more flexible, and more stable monetary and financial system. Fed began to issue Federal Reserve Notes (FRNs) in 1914. FRNs initially converted to gold on demand, circulated at par with gold, and were declared legal tender.

Many banks failed across the nation from 1930-1933. Convertibility to gold was suspended in 1933 under a series of executive orders, legislation, and court decisions. Private holdings of gold were nationalized. Banks were prohibited from sending gold to foreigners in payment. The nation was taken off the domestic gold standard. Although the United States continued to define the dollar in terms of gold, under the Gold Reserve Act of 1934, no domestic entity could convert FRNs, gold certificates, or any other instrument into gold. Private gold holdings were limited to collecting rare coins and to non-monetary uses. The government issued silver coins as legal tender until 1963.

During the period 1933-NOW (present) the federal government issues fiat paper currency as Federal Reserve Notes (FRNs) which are classified as liabilities of the Federal Reserve System (Fed). The federal government issues a small float of base metal coins which are classified as liabilities of the Treasury.

[1] Brief History of the Gold Standard in the United States. Elwell, Craig K., Congressional Research Service, June 23, 2011.