The History of the Dollar

Dollar adaptation

Is the dollar a viable currency going forward? Some question whether it will be, so let’s take a look back at how the currency has developed.

The dollar actually originated in Germany in a place called Joachimsthal in modern day Bavaria; silver from the area was minted in “thalers” (valley in German). Governments in Europe adopted this coin as a way to standardise their commerce and Europe became a dollar standard area with identical coins produced in multiple locations.

When the Spanish colonised the New World, especially when they moved into Mexico, the new Spanish silver dollar emerged and eventually became the most popular coin in the colonies.

Circumstances

After a tumultuous period and experiments with floating and paper currency, the US experienced an episode of hyperinflation in the 1740s and 1780s and the currency was devalued again following the end of The Civil War; although the first permanent devaluation of the dollar came during the great depression in 1933. Prior to World War One, the gold standard system was used, but following the end of the Great War, trying to restore this system left the global economy prone to attack, hence the Great Depression.

great-depression-001. – USA annual real GDP from 1910 to 1960, with the years of the Great Depression (1929–1939) highlighted.
2. – The unemployment rate in the US during 1910–60, with the years of the Great Depression (1929–39) highlighted.Source: Wikipedia.com

Following World War Two, a system of fixed and flexible exchange rates was established (the Bretton-Woods system) and this agreement was sealed under the gaze of the International Monetary Fund (IMF). In essence, the US had to keep a fixed rate of exchange with other nations, yet they would have some flexibility to negotiate in extreme or exceptional circumstances. Such circumstances included:

Intense inflation
Rises in the cost of imports
Recession
Significantly overvalued currency

Again, in the 1960s, the US sought to devalue its currency and the Bretton-Woods system officially failed in 1973. Its successor was a system where major currencies simply float against one another, but are still subject to guidance from external parties and national governments.

bretton-woods-us-dollar-systemSource: Grips.ac.jp Read more: History of International Monetary Systems

Nixon regime

Many argue that the introduction of the floating currency was an unintended by-product of other activities during the Nixon regime; it led to the dollar losing around 90% of its value and was supposed to be temporary in nature. That said, it could be argued that it was one of the most major changes to Western society as we know it and ushered in a period of stability of sorts.

nixon-regime-00Source: Wikipedia.com

Stable Dollar

Modern Capitalism is based around having a stable dollar – most economists and financial historians will accept this notion. Nixon-led floating currencies aside, there is a growing feeling that a return to a more traditional interpretation of capitalism is around the corner; moreover it is needed.

Forecast of the Dollar

Many forward thinking nations have plans in place for the day when the dollar fails and it is replaced. Russia and China are two such powerhouses who have not been shy about their forecast of the dollar’s demise.


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