Connect with us

Currency

31 Fascinating Facts on the Early History of the U.S. Dollar

Published

on

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

31 Fascinating Facts on the Early History of the U.S. Dollar

Today, we all know the U.S. dollar as an iconic currency that is recognizable to people around the world.

And while we’ve previously looked at the buying power of the U.S. dollar over time, as well as important events like the Great Depression, we have not looked at the history of the dollar itself.

How and why was it conceived, and why do we call it a “dollar” or a “buck”? How did the dollar’s early history help to shape today’s world?

Before the Dollar

For the early colonists, currency was a bit of a free-for-all.

Officially, cash was denominated in pounds, shillings, and pence, but in reality things were a different story. Cash was often scarce, and colonists needed to be innovative to fulfill transactions. At various points in time, they used tobacco, beaver skins, and wampum in the place of money. Some colonies even tried to issue their own fiat currencies – many of which went bust.

As it turned out, the Spanish dollar was often the most abundant form of cash – and this is what led to U.S. currency eventually being denominated in dollars.

The Revolution

During the American Revolution in 1775, the Continental Congress issued a money known as the Continental Currency to try and fund the war. The government printed too many, and the value of a Continental diminished rapidly.

Just five years later, after runaway inflation, the Continental was worth 2.5% of its face value. Benjamin Franklin rightly noted that the depreciation of the Continental had, in fact, acted as a tax to pay for the war. Holders of the currency – everyday people – were punished by losing massive amounts of buying power. Interestingly, this is where we get the phrase “Not worth a Continental”.

Birth of the Dollar

The failure of the Continental Currency must have been top of mind during the writing of the Constitution. A clause was even added, under Article 1, Section 10, to make sure such a failure would never happen again. It was written that states were not permitted to “coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.”

And so, the Coinage Act of 1792 created the U.S. dollar as a standard unit of currency. The U.S. Mint was authorized to oversee coinage, and the Act also established a penalty of death for debasing coinage issued by the Mint.

The Almighty Buck

In the 19th Century, a new slang term emerged for the dollar.

Especially in the Great Lakes area, different amounts of money were equated with animal skins. One particular reference showed that in Ohio in 1851, the skin of a muskrat was worth $0.25, and that of a doe was worth $0.50. Meanwhile, the skin of a buck was equal to the “almighty dollar” – and hence, the word “buck” became synonymous with the U.S. dollar.

The Civil War

Leading up to the Civil War, private banks around the country issued their own paper currencies.

With 10,000 or so of these currencies in circulation as the war broke out, governments soon found it very cumbersome to try and pay debts with many different types of notes. As a result, the $10 Demand Note was the first official paper currency issued in 1861 by the government to help finance the war.

The North began paying debts with a fiat currency called the “greenback”, while Confederate states issued their own paper currency as well. The latter was worthless by the time the Confederacy lost the war.

The Counterfeiting Problem

Around this time, counterfeiting was a widespread problem with greenbacks and all the private notes that were circulating. More than 1/3 of bills were fake at this time.

Sophisticated counterfeit operations were happening in British Canada, and some bank engravers would even moonlight as counterfeiters, using the same plates and dyes they had from their day job.

To deal with the problem, the Secret Service was formed in 1865.

The Modern Dollar

Counterfeiting measures have come a long way since the late 19th century. Today, it’s estimated that less than 0.01% of notes are fake.

Learn more about the modern U.S. dollar in the next part of this series.

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

Get a free Beginner's Guide to Buying Precious Metals

Continue Reading
Comments

Central Banks

The History of Interest Rates Over 670 Years

Interest rates sit near generational lows — is this the new normal, or has it been the trend all along? We show a history of interest rates in this graphic.

Published

on

The History of Interest Rates Over 670 Years

Today, we live in a low-interest-rate environment, where the cost of borrowing for governments and institutions is lower than the historical average. It is easy to see that interest rates are at generational lows, but did you know that they are also at 670-year lows?

This week’s chart outlines the interest rates attached to loans dating back to the 1350s. Take a look at the diminishing history of the cost of debt—money has never been cheaper for governments to borrow than it is today.

The Birth of an Investing Class

Trade brought many good ideas to Europe, while helping spur the Renaissance and the development of the money economy.

Key European ports and trading nations, such as the Republic of Genoa or the Netherlands during the Renaissance period, help provide a good indication of the cost of borrowing in the early history of interest rates.

The Republic of Genoa: 4-5 year Lending Rate

Genoa became a junior associate of the Spanish Empire, with Genovese bankers financing many of the Spanish crown’s foreign endeavors.

Genovese bankers provided the Spanish royal family with credit and regular income. The Spanish crown also converted unreliable shipments of New World silver into capital for further ventures through bankers in Genoa.

Dutch Perpetual Bonds

A perpetual bond is a bond with no maturity date. Investors can treat this type of bond as an equity, not as debt. Issuers pay a coupon on perpetual bonds forever, and do not have to redeem the principal—much like the dividend from a blue-chip company.

By 1640, there was so much confidence in Holland’s public debt, that it made the refinancing of outstanding debt with a much lower interest rate of 5% possible.

Dutch provincial and municipal borrowers issued three types of debt:

  1. Promissory notes (Obligatiën): Short-term debt, in the form of bearer bonds, that was readily negotiable
  2. Redeemable bonds (Losrenten): Paid an annual interest to the holder, whose name appeared in a public-debt ledger until the loan was paid off
  3. Life annuities (Lijfrenten): Paid interest during the life of the buyer, where death cancels the principal

Unlike other countries where private bankers issued public debt, Holland dealt directly with prospective bondholders. They issued many bonds of small coupons that attracted small savers, like craftsmen and often women.

Rule Britannia: British Consols

In 1752, the British government converted all its outstanding debt into one bond, the Consolidated 3.5% Annuities, in order to reduce the interest rate it paid. Five years later, the annual interest rate on the stock dropped to 3%, adjusting the stock as Consolidated 3% Annuities.

The coupon rate remained at 3% until 1888, when the finance minister converted the Consolidated 3% Annuities, along with Reduced 3% Annuities (1752) and New 3% Annuities (1855), into a new bond─the 2.75% Consolidated Stock. The interest rate was further reduced to 2.5% in 1903.

Interest rates briefly went back up in 1927 when Winston Churchill issued a new government stock, the 4% Consols, as a partial refinancing of WWI war bonds.

American Ascendancy: The U.S. Treasury Notes

The United States Congress passed an act in 1870 authorizing three separate consol issues with redemption privileges after 10, 15, and 30 years. This was the beginning of what became known as Treasury Bills, the modern benchmark for interest rates.

The Great Inflation of the 1970s

In the 1970s, the global stock market was a mess. Over an 18-month period, the market lost 40% of its value. For close to a decade, few people wanted to invest in public markets. Economic growth was weak, resulting in double-digit unemployment rates.

The low interest policies of the Federal Reserve in the early ‘70s encouraged full employment, but also caused high inflation. Under new leadership, the central bank would later reverse its policies, raising interest rates to 20% in an effort to reset capitalism and encourage investment.

Looking Forward: Cheap Money

Since then, interest rates set by government debt have been rapidly declining, while the global economy has rapidly expanded. Further, financial crises have driven interest rates to just above zero in order to spur spending and investment.

It is clear that the arc of lending bends towards ever-decreasing interest rates, but how low can they go?

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Banks

The World’s Most Powerful Reserve Currencies

Here are the reserve currencies that the world’s central banks hold onto for a rainy day.

Published

on

The World’s Most Powerful Reserve Currencies

When we think of network effects, we’re usually thinking of them in the context of technology and Metcalfe’s Law.

Metcalfe’s Law states that the more users that a network has, the more valuable it is to those users. It’s a powerful idea that is exploited by companies like LinkedIn, Airbnb, or Uber — all companies that provide a more beneficial service as their networks gain more nodes.

But network effects don’t apply just to technology and related fields.

In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.

What’s a Reserve Currency?

Today’s visualization comes to us from HowMuch.net, and it breaks down foreign reserves held by countries — but what is a reserve currency, anyways?

In essence, reserve currencies (i.e. U.S. dollar, pound sterling, euro, etc.) are held on to by central banks for the following major reasons:

  • To maintain a stable exchange rate for the domestic currency
  • To ensure liquidity in the case of an economic or political crisis
  • To provide confidence to international buyers and foreign investors
  • To fulfill international obligations, such as paying down debt
  • To diversify central bank portfolios, reducing overall risk

Not surprisingly, central banks benefit the most from stockpiling widely-held reserve currencies such as the U.S. dollar or the euro.

Because these currencies are accepted almost everywhere, they provide third-parties with extra confidence and perceived liquidity. This is a network effect that snowballs from the growing use of a particular reserve currency over others.

Reserve Currencies Over Time

Here is how the usage of reserve currencies has evolved over the last 15 years:

Currency composition of official foreign exchange reserves (2004-2019)
🇺🇸 U.S. Dollar 🇪🇺 Euro🇯🇵 Japanese Yen🇬🇧 Pound Sterling 🌐 Other
200465.5%24.7%4.3%3.5%2.0%
200962.1%27.7%2.9%4.3%3.0%
201465.1%21.2%3.5%3.7%6.5%
201961.8%20.2%5.3%4.5%8.2%

Over this timeframe, there have been small ups and downs in most reserve currencies.

Today, the U.S. dollar is the world’s most powerful reserve currency, making up over 61% of foreign reserves. The dollar gets an extensive network effect from its use abroad, and this translates into several advantages for the multi-trillion dollar U.S. economy.

The euro, yen, and pound sterling are the other mainstay reserve currencies, adding up to roughly 30% of foreign reserves.

Finally, the most peculiar data series above is “Other”, which grew from 2.0% to 8.4% of worldwide foreign reserves over the last 15 years. This bucket includes the Canadian dollar, the Australian dollar, the Swiss franc, and the Chinese renminbi.

Accepted Everywhere?

There have been rumblings in the media for decades now about the rise of the Chinese renminbi as a potential new challenger on the reserve currency front.

While there are still big structural problems that will prevent this from happening as fast as some may expect, the currency is still on the rise internationally.

What will the composition of global foreign reserves look like in another 15 years?

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Standard Lithium Company Spotlight

Subscribe

Join the 130,000+ subscribers who receive our daily email

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular