Today, we all know the U.S. dollar as an iconic currency that is recognizable to people around the world.
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.
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 World’s Most Powerful Reserve Currencies
Here are the reserve currencies that the world’s central banks hold onto for a rainy day.
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:
|🇺🇸 U.S. Dollar||🇪🇺 Euro||🇯🇵 Japanese Yen||🇬🇧 Pound Sterling||🌐 Other|
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.
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?
Why Gold is Money: A Periodic Perspective
Gold has been used as money for millennia. People often attribute this to beauty, but there are basic physical properties for why gold is money.
Why Gold is Money
The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.
However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.
Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.
The Periodic Table
The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.
Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:
- Gases and Liquids
Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
- Lanthanides and Actinides
Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
- Alkali and Alkaline-Earth Metals
Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
- Transition, Post Transition Metals, and Metalloids
There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
- Super Rare and Synthetic Elements
Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.
Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.
Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.
Gold as Money
Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.
Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.
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