Pin Me

Past Value of the Dollar and Causes of Change

written by: Bruce Tintelnot•edited by: Jean Scheid•updated: 9/13/2011

Presented here is a brief timeline of the history of the dollar in the United States showing the most dramatic changes in it's value, and a discussion about what causes the value of the dollar to change. Some of the past values of the dollar may surprise you.

  • slide 1 of 5

    Colonial American Currencies

    Philip V Coin Wikimedia Commons The 1500s to the American Revolution brought scarce money times for Britain's American colonies. There were no gold or silver mines to be found, so any coins were brought in through commerce, and in that regard, the colonies were an out-of-the-way backwater for the rest of the world. As soon as gold or silver coins made their way to the colonists, the larger denominations would be used to buy imported goods, usually from Britain, and quickly traveled back out of the country.

    The most common coin that they all saw was the silver Spanish dollar. This is where the word dollar that is used today comes from, hence the beginning of the value of the dollar and its history. It was chosen over the English pound because it was so much more familiar. Its weight content was .93055 fine, which calculates to .9016 ounces of silver that could be found in each coin.

  • slide 2 of 5

    The Continental Dollar of the American Revolution

    Continental six dollars copy 1875 Wikimedia Commons The first actual paper currency that could be considered issued by the United States government was the result of a bill passed on June 22, 1775 by the Continental Congress. The colonies had just declared independence from Britain, and needed to finance an army in preparation for the anticipated war. Bills of credit were to be issued against the amount of 2 million Spanish "milled" dollars. They were to be redeemable in four equal installments from November 1779, and to be paid by taxing the states. This was the first paper money to represent all of the colonies, and they were called Continentals.

    The value of this currency fluctuated with how the army was faring in the war. A tactic utilized by the British that caused the value of the dollar to change was to spread counterfeit Continentals into areas not within their control. This had some very hard felt effects wherever the British had been for awhile. George Washington attested to this during the winter of 1777/1778 when he wrote, “A wagon load of money will scarcely purchase a wagon load of provisions."

    When the end of the Revolution and independence seemed imminent, their value plummeted because no one knew how Congress was going to pay for them. The states couldn't pay the tax because they were having problems with their own currencies, and by 1780 Congress revalued the currency to forty Continentals equaling one dollar of hard currency. This would make the past value of the dollar worth 1/40 of the Spanish dollar at that time, which would be equal to .021428 ounces of silver. The worth of the Continental dollar began falling within a couple of days, and, eventually, it just faded away amid jokes of creditors hiding from debtors trembling in fear of being paid, and other more practical uses for worthless paper; one person on record found a way to make a suit of Continental dollars.

  • slide 3 of 5

    Paper and Silver Dollars of the New Republic

    When the War of Independence ended, questions arose as to what economic and financial systems should be established. There were basically two schools of thought on this; one championed by the Secretary of the Treasury, Alexander Hamilton, and the other by Secretary of State, Thomas Jefferson.

    Hamilton believed that the new nation should strive to develop itself into a prosperous, industrial economy, and that large banks would provide credit to achieve this. He also believed in a strong central government with broader authority to grant charters to banks and supervise their lending practices. Bank currencies would be issued against government securities held in reserve at a central bank.

    Jefferson opposed the large banks and supported the rights of states to charter the banks and supervise them. He also believed in a central government with very limited power over a largely agrarian citizenry. He disliked the idea of paper currency that might become concentrated in the hands of a small, powerful group, and favored hard currency, known as species, that could be spread among the people.

  • slide 4 of 5

    The First Bank of the United States

    One US dollar 1917 Wikimedia Commons Congress approved a twenty-year charter in 1791 for the First Bank of the United States that was signed into law on February 25, 1791 by President Washington. The bank provided the usual banking services for the public of making loans, accepting deposits, issuing currency, and buying securities. It also provided convenient services to the government.

    It's currency of banknotes was backed by the promise of an exchange for gold or silver on demand utilizing fractional reserves of species. The exchange was an equal amount of species for the face value of the currency, except during a liquidity crisis.

    The Mint Act, passed on April 2, 1792, determined the weight and fineness of the US species. The US silver dollar would contain 371.25 grains of silver, and weigh 416 grains giving it a fineness of 1485/1664, and containing .848572 ounces of silver. The Spanish dollar In comparison weighed 375 grains, and contained .857144 ounces of silver.

    The past value of this new dollar was subject to trade shocks within the economy due to the fact that the bank had no regulating tools, and a small amount of reserves. During a recession, they would call in old loans, and stop making new ones to protect their reserves. This action further reduced the money supply, and the value of the dollar.

  • slide 5 of 5

    The Bank of the United States did eventually accomplish what it had set out to do. It brought the newly created United States into the nineteenth century with a common national currency, and provided needed banking services to the people and the government, despite many fears and criticisms of it's power and ability.

References