The monetary systems are dynamic, and so is that of the United States of America. It has been a dynamic one with various changes being done on the traditional monetary systems. New systems are in place and as such, the economy of America runs on different systems from the other countries of the globe. With the introduction of currency in the world, the USA has used and changed the value of their currency with the help of various institutions such as the Federal Reserve system for a variety of reasons (The Federal Reserve, 2013). Various presidents wanted to achieve various goals by changing the operations in the economy through changes in the currency. As such, the trade with other countries has taken several different forms as a result of the changes introduced at various times in the history of America. This paper explores these developments as well as the various institutions and their impacts on the USD. It also looks at the various forms of money and the changes in value of the dollar. Various policies that changed the face and the value of the United States dollar from the time it was backed by gold or other valuable metals up to now that the dollar is just in the form of paper money will be explored. The reasons behind these changes and whether they were genuine or nor, if they have benefited the country or they have ruined its economy are facts that will be discussed in this paper.
HISTORY OF US DOLLAR
The United States dollar is official the currency of America as well as its overseas provinces or territories. The dollar is subdivided into cents where one hundred cents that are equal to one dollar. It is among the hard currencies of the world and is commonly used in several countries as the medium of foreign exchange. The dollar is also an official currency in some other countries, on the globe such as the British Virgin Islands. Its history date more than two hundred years ago from the instance it was introduced by the Spanish national in America at that time. Its name comes from the Spanish dollar (Aiton, 1999). The American dollar has since been valued using various valuable items, precious metals being the most common in the early days. The most common precious metals were gold and silver. The dollar coins were minted from these metals and were designated to be a legal tender. A copper alloy dollar was named Sacagawea dollar while the silver dollar was called the American silver Eagle. The dollar coins ranged from one cent to fifty dollars.
The administration of President George Washington paid much attention to the monetary issues of the state, and most of the changes began from there. He was backed by the then secretary of the treasury Alexander Hamilton. He proposed the coinage act in 1792 that was passed by the congress. It sought to establish the dollar to be a unit of account. Gold rose in the 19th century in relation to silver and so, all gold coins were removed from commerce as well as their melting. Another coinage act was passed in 1834 whereby the ratio of silver to gold in the dollar was altered from 15:1 to 16:1. As such, the new dollar was backed by 1.50 grams of gold from the earlier one of 1.60 grams. Its the first devaluation of the dollar as the value of gold was reduced by 6 %. The silver and gold were still useful in commerce (Nussbaum, 2000).
The value of silver coins was again reduced in 1853 with the effect of placing the country on the gold standard effectively. Foreign coins like the Spanish dollar were still in use until 1857. The dollar became the sole currency in 1863, and it has remained as such even today. Bland-Alison act was enacted in 1878 providing for a freer coinage silver. The government was to buy from $ 2 million to $ 4 million worth of bullion of silver every month at the prices prevailing in the market and coin it into silver coins. This was seen as a subsidy to the politically influential producers of silver. Large silver deposits were discovered in western United States during the late 19th century, and it created political controversy. The increase of silver led to the reduction of silver coinage and some of the organisations wanted to retain the bimetallic standard in an attempt to inflate the dollar. The inflation of the dollar was aimed at helping the farmers to repay their loans and debts more easily. On the contrary, the eastern banking and other commercial interests were for sound money thus a switch to the gold standard. The controversy did not bar the diminishing of the status of silver as it went through several legislations from 1873 to 1900. Gold standard was finally adopted formally. The gold standard underwent several modifications, but it survived (Nussbaum, 2000).
THE GOLD STANDARD AND SILVER STANDARD
The gold standard was adopted formally in 1900 when the gold standard act was enacted in March 14, 1900. Thus, gold and silver became the legal tender coinage of the United States. The guaranteed dollar was convertible to 1.5 grams of gold. America suspended twice the gold standard during the World War 1. In one instance, it was suspended fully and the second one it was suspended for foreign exchange. US companies at the time had huge debts payable to Europe and the European entities began to liquidate the American debts in gold. The resultant was the exchange rate of the dollar to the British pound hiked to reach the level of $ 6.75 that was above the parity of the gold that was ($ 4.8665). There was then large gold outflows that led to the closure of the gold standard in 1914 by the New York stock exchange (Nussbaum, 2000). The nationally chartered banks got instructions from the treasury department to issue emergency currency in an attempt to save the exchange value for the dollar. The Federal Reserve, that was newly created organised funds that would assure debts to foreign creditors. The efforts were successful and notes called Aldrich-Vreeland was created. The notes were retired later in November and the gold standard restored.
The United States could retain their gold standards during the war as they remained neutral. Other countries had abandoned it. It had no restrictions to import or export gold. When America joined the war, the president, Wilson, banned gold export and, therefore, the gold standard was suspended for foreign exchange. The countries returned to the gold standard after the war although in an altered form. It was again abandoned during the great depression as any other currency had done. The Federal Reserve did raise the interest rates in a bid to protect the gold standard of the United States dollar. This worsened the pressures of the domestic economy (Aiton, 1999). People started hoarding gold coins after the bank runs were more pronounced in the early 1933. Hence, there was distrust for banks as well as distrust for paper money that worsened deflation and consequently depletion of the gold reserves.
The congress passed and implemented many acts concerning the issue of the gold standard starting as early as 1993in order to fight deflation that had become severe. The gold standard was suspended except for the foreign exchange. The suspension revoked the gold as the legal tender for the universal debts. Private ownership was banned for considerably big amounts of gold coins. For the purpose of foreign exchange, the dollar that was set at $ 20.67 per ounce was lifted thus allowing the dollar to float freely, that is, in the foreign markets. There was no set value of gold. The value was, however, restored later as the concerns to control the prices of gold in the private market were abandoned. As such, the gold price started to ascend and so did the price of oil as well as other commodities rose. The commodity prices became more volatile and so, the oil-gold exchange rate remained the same in the 1990s. There was fear that a specie gold based economy would emerge that would be separate from the central banking. This would threaten to collapse the dollar. To avoid it, trading underwent several changes.
The use of the silver standard as a legal tender intensified in the late 1870s whereby silver certificates were printed and issued as part of the circulation of the paper currency. The issuance was as a result of the agitation by the US citizens who were not happy with the fourth coinage act (Highfill, 1992). The silver certificates were used together with the dollar notes that were gold based. The certificates were redeemable in terms of silver dollar coins, but they later could be redeemed for raw silver bullion. They were issued in three major denominations; $ 1, $ 5, as well as $ 10 notes. An act called Agricultural Adjustment Act was passed. It had a clause that allowed pumping of silver into the market in order to replace gold.
Use of silver denominations was, however, delayed until 1974 partly due to the problem in the requisitioning of the necessary silver. There was a state of misunderstanding as well as un-cooperation between the secretary of state and the secretary to the treasury. Hamilton, who was the secretary to the treasury, was accused of non-cooperation in the determination of the requisitions as a result of personal problems. The mint engraver of the time was Robert Scot, who minted the first silver coins, as well as the flowing hair of the dollar. It is suspected that Robert Scot used the eagle design of Engraver Joseph Wright that was the 1972 quarter dollar coin (Highfill, 1992). The silver dollar coins were minted using the copper and silver alloys with a diameter of 39 to 40 millimetres.
A new design for the silver coin called the New Draped Bust came into existence in 1795, and it went through into the 1800s. No one knew exactly the reasons for the change in design, but speculations have it that there must have some political situation must have been the cause. It is speculated that the design was intended to show a notion to the Spanish king that some reforms in the coinage had taken place, just as what happened to the Spanish 8-reelers or the milled dollar coins that had changed, that is, from a pillars and hemispheres. The silver dollar could not compete with the Spanish milled dollars because of lower weight, and it was more impure as compared to the Spanish dollar. The discovery of more silver deposits, as mentioned earlier, led to a corresponding decrease in the minting of the silver dollars until around 1802 when the quantities of silver started to reduce (Highfill, 1992).
The dollar became an international currency during the World War 2 when the economies of Asia and Europe were harmed by the war while that of America was not. As a result, the European governments used all their gold reserves and thus; they had to borrow to pay America for the war materials. This helped America to accumulate large gold reserves that gave America a significant economic, as well as political power after the war. Bretton Woods Agreement was signed to codify the dominance of the dollar. As the allies wanted to create an international monetary system that would sustain the global economy as well as prevent economic malaise after the war, the dollar was accepted as an international legal tender for the allies (Highfill, 1992).
THE PAPER MONEY
Paper money came into use in the United States of America in the period between 1862 and 1971 when it was introduced as a legal tender. The paper money was in the form of currency notes, and they were issued for a longer period that any other currency used in the United States of America. The money was popularly known as "greenbacks", and they replaced others that were given the name demand notes. The issuance of the US notes came to an end in January 1971, and they existed as the valid currency notes but were rarely in circulation. Both the federal notes, as well as the United States notes, were part of the national currency in the United States of America. They came to be used as a legal tender after the recall of all gold in 1933, and both are in circulation in the same way. The only difference between them is that the Federal Reserve notes are usually backed by debt purchased by the reserve (Marotta, 2014). The United States note represents a bill of credit. The paper money is not backed by any concrete commodity as was earlier where the dollar was backed by gold. It is called fiat money that derives its value from the constitution or the government law. The government only declares it as a legal tender or the accepted form of payments.
FEDERAL RESERVE SYSTEM
The Federal Reserve plays roles the central bank of the United States of America. It came to existence on 1993 December 23rd when the Federal Reserve act came into force in response to the financial panics especially the severe panic of 1907. The roles and duties have changed with time as they have expanded, and the structure evolved. The great depression was the major factor that led to the changes in the system. The congress identified three core objectives of the United States monetary policy in the Federal Reserve act (Johnson, 2001). They were stable prices, maximum employment and moderate (long term) interest rates. Stable prices, as well as the maximum employment, are sometimes called the reserve's dual mandate. The functions the federal reserve have expanded to include conducting monetary policy, maintenance of the of the stability of America's financial system, regulating as well as supervising banking institutions and providing financial services to the government, depository institutions as well as foreign official institutions. It also conducts research of the economy as well as releasing publications that include the Beige Book.
The structure of the Federal Reserve System's constitutes the board of governors appointed by the president, (or Federal Reserve Board). It also comprises of The Federal open market committee (FOMC), regional Federal Reserve Banks (twelve in number) located in major cities throughout the country, several private banks as well as various advisory councils. FOMC is responsible for setting monetary policies. It is composed of all the seven board of governors and the twelve regional banks. Only five of the regional bank's heads vote at any one time. The reserve also has private elements as well as public components. The aim for both of the components is to enable the bank to serve both the private banks and the general public. It is, thus, a unique feature of the Federal Reserve that is different from any other central bank in the world. It is also a unique feature that the currency is created by an outside entity, that is, the department of the treasury. It is autonomous in the sense that the monetary policies it puts in place do not have to be approved by anybody, not even the president. The funding received is not approved by the congress.
The system derives its authority from statutes enacted by the congress and is subject to oversight by the congress. The board of governors among them the chairperson and vice chairperson is appointed the president and approved by the senate. The board members receive salaries as set by the federal government. The national banks are obliged to hold stocks with the Federal Reserve Bank in the regions they operate that entitles them to choose some members of the board of the regional reserve bank. The annual profits are handed over to the government after 6% statutory dividends are paid out to the member banks' capital investment. An account surplus is maintained as well.
Functions of the Federal Reserve
The functions of the federal systems are as follows:
- ØAddressing the issue of banking panics
- ØThe Federal Reserve plays the role of central bank of the United States of America
- ØBalancing between the government and the private interests
- ØRegulate and supervise banking institutions
- ØProtect consumer credit rights
- ØManaging money supply through the monetary policy to achieve stable prices, maximum employment as well as moderate long term rates of interests.
- ØMaintaining the financial system stability
- ØOffering financial services to the government, depository institutions as well as foreign official institutions. This is aimed to facilitate regional exchange of payments and also to respond to the local liquidity needs.
- ØEnabling the standing of the United States in the world economy (The Federal Reserve System, 20133).
In addressing the problem of bank panics, the banks hold stocks in the Federal Reserve. These stocks are currency amounts as well as deposits in other banks. The stocks are fractional amounts, and they must equal to the liabilities of the bank to customers. Factional reserve banking is the name given to this process. The result of the fractional reserve banking is that the banks invest most of the funds they receive as deposits. There are occasions that the banks may require the help of other banks to continue operating especially when the customers withdraw their savings. This is called a bank run. Bank runs result to various problems, both economic and social. One of the responsibilities of the Federal Reserve is to prevent the occurrence o the bank runs and thus, acts as the lender of the last resort.
The Federal Reserve has the function of checking clearing systems. It was given this function after some banks had refused to clear the checks from other banks. The congress wanted to eliminate the financial crisis that loomed in the country as the one that occurred in 1907 and caused financial panics. The payments in that period were disrupted as the banks as well as the clearinghouses refused to clear checks from other banks. The system could, therefore, provide an elastic currency as well as equitable and efficient system of check collection.
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