The US dollar (USD; $) is the official currency in the United States of America. It is also legal tender in seven other countries: Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, East Timor, and Zimbabwe. The US dollar is also the reserve currency for many countries around the world.  

The US Dollar Is Used As Official Currency By Other Countries | Source: AS

In addition, the US dollar is divided into 100 cents. It was created through the Coinage Act of 1792, which defined the value of the dollar. According to this law, the dollar would be equal to between 371 and 417 grains of silver and an eagle ($10) would be equivalent to between 247 and 270 grains of gold. In other words, the Coinage Act introduced the US dollar at par with the Spanish silver dollar. Early dollar notes were used as demand notes to finance the Civil War in 1861.  Though the dollar gained popularity, other currencies still circulated in the US.  

At One Time The Dollar Was Backed By Physical Gold | Source: AS

The bimetallic standard of the US dollar was repealed in 1900 due to the Gold Standard Act of 1900, which defined the value of the dollar in relation to gold. This gold standard was revised in 1935 to $35 per troy ounce of gold. However, the gold standard was hard to maintain. The dollar was devalued in terms of its gold content and in 1968, the requirement of holding gold reserves against the Federal Reserve was repealed. Three years later in 1971, the US proclaimed that it would stop converting the dollar at the exchange rate against gold. In 1976, the definition of the dollar in relation to gold was officially removed and the link between gold and the dollar was severed.  

The Federal Reserve System 

The United States has its own central banking system known as the Federal Reserve System. The Federal Reserve was established in 1913 and centralized the circulation and printing of US dollars.  

The Outside Of The Federal Reserve | Source: AS

The US dollar banknote is currently issued in the following currency denominations: $1, $2, $5, $20, $50, and $100. The $500 and $1,000 were circulated in limited amounts until 1969 when they were withdrawn from circulation completely. Each banknote feature a portrait of a president or a founding father in front. Meanwhile, the backside of the notes features different landmarks related to the person featured. For example, the $5 note features Abraham Lincoln in front and the Lincoln Memorial at the back. The only exemptions are the $1 note that features George Washington and the Great Seal of the US, and the $2 note that features Thomas Jefferson and John Trumbull’s Declaration of Independence.   

USD Denominations | Source: Wikipedia

The Dollar as the World Reserve Currency 

During the two World Wars, the US was the main supplier of weapons and other goods for the Allied Powers. The Allies paid for their supplies in gold. At the end of the Second World War, the US held most of the world’s gold supply. Because most of the countries depleted their gold supply, the return to the gold standard was impossible.  

United States 25 Cents | 1863 | Source: Banknote World Educational

In 1944, delegates from 44 Allied countries met in Bretton Wood to form a fair foreign exchange system. The delegates decided that their currencies would no longer be linked to gold but to the dollar. The result of this meeting became known as the Bretton-Woods agreement.  

United States 5 Dollars | 1912 | Source: Banknote World Educational

The Bretton-Woods agreement established the authority and responsibility of central banks to maintain the exchange rates between the dollar and their own currencies. In return, the US would redeem the dollar for gold on demand.  

United States 10 Dollars | 1929 | Source: Banknote World Educational

Due to the Bretton-Woods agreement, central banks stocked up on dollars instead of gold reserves. However, during the Vietnam War, the US flooded the market with paper money due to deficit spending. Many countries feared that the value of the dollar is becoming more unstable and converted their dollar reserves into gold. The demand for gold led to the severance of the link between gold and the dollar in 1976 and the dollar became a free-floating currency. The dollar is currently the most widely used currency in international transactions and has its own foreign exchange index called the US Dollar Index (USDX).   

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