History of The United States Dollar - Early History

Early History

The history of the dollar in North America pre-dates American independence. It began with the issuance of early American currency called the colonial scrip. Even before the Declaration of Independence, the Continental Congress had authorized the issuance of dollar denominated coins and currency, since the term 'dollar' was in common usage referring to Spanish colonial eight-real coin or Spanish dollar. Though several monetary systems were proposed for the early republic, the dollar was approved by Congress in a largely symbolic resolution on August 8, 1785. After passage of the Constitution was secured, the government turned its attention to monetary issues again in the early 1790s under the leadership of Alexander Hamilton, the secretary of the treasury at the time. Congress acted on Hamilton's recommendations in the Coinage Act of 1792, which established the dollar as the basic unit of account for the United States. The word dollar is derived from Low Saxon cognate of the High German Thaler, an abbreviation of Joachimsthaler – (coin) from Joachimsthal (St. Joachim's Valley, now Jáchymov, Bohemia, then part of the Holy Roman Empire, now part of the Czech Republic; for further history of the name, see dollar.) – so called because it was minted from 1519 onwards using silver extracted from a mine which had opened in 1516 near Joachimstal, a town in the Ore Mountains of northwestern Bohemia.

Because gold and silver in the open marketplace vary independently, the production of coins of full intrinsic worth under any ratio will nearly always result in the melting of either all silver coins or all gold coins. In the early 19th century, gold rose in relation to silver, resulting in the removal from commerce of nearly all gold coins, and their subsequent melting. Therefore, in 1834, the 15:1 ratio of silver to gold was changed to a 16:1 ratio by reducing the weight of the nation's gold coinage. This created a new U.S. dollar that was backed by 1.50 g (23.22 grains) of gold. However, the previous dollar had been represented by 1.60 g (24.75 grains) of gold. The result of this revaluation, which was the first-ever devaluation of the U.S. dollar, was that the value in gold of the dollar was reduced by 6%. Moreover, for a time, both gold and silver coins were useful in commerce.

In 1853, the weights of U.S. silver coins (except, interestingly, the dollar itself, which was rarely used) were reduced. This had the effect of placing the nation effectively (although not officially) on the gold standard. The retained weight in the dollar coin was a nod to bimetallism, although it had the effect of further driving the silver dollar coin from commerce. Foreign coins, including the Spanish dollar, were also widely used as legal tender until 1857.

With the enactment of the National Banking Act of 1863, during the American Civil War and its later versions that taxed states' bonds and currency out of existence, the dollar became the sole currency of the United States and remains so today.

In 1878, the Bland-Allison Act was enacted to provide for freer coinage of silver. This act required the government to purchase between $2 million and $4 million worth of silver bullion each month at market prices and to coin it into silver dollars. This was, in effect, a subsidy for politically influential silver producers.

The discovery of large silver deposits in the Western United States in the late 19th century created a political controversy. Due to the large influx of silver, the value of silver in the nation's coinage dropped precipitously. On one side were agrarian interests such as the United States Greenback Party that wanted to retain the bimetallic standard in order to inflate the dollar, which would allow farmers to more easily repay their debts. On the other side were Eastern banking and commercial interests, who advocated sound money and a switch to the gold standard. This issue split the Democratic Party in 1896. It led to the famous "cross of gold" speech given by William Jennings Bryan, and may have inspired many of the themes in The Wizard of Oz. Despite the controversy, the status of silver was slowly diminished through a series of legislative changes from 1873 to 1900, when a gold standard was formally adopted. The gold standard survived, with several modifications, until 1971.