The U.S. dollar was first designated as the world's currency in the 1944 Bretton Woods Agreement, and it is the most powerful currency in the world. It's backed by the world's largest economy, the United States. The strength of the U.S. economy supports the dollar's use as a global currency.
The term "U.S. dollar" refers to a specific denomination and the U.S. currency in general. It was initially traded as a coin worth its weight in silver or gold and then exchanged as a paper note redeemable in gold. During the 1970s, the gold standard was dropped, and the dollar's value was allowed to float. Today, although its value fluctuates, it's in strong demand.
Although the dollar is still represented by currency, its true value is represented by credit. Now more than ever, the U.S. dollar is the real symbol of faith in the power of the U.S. economy.
U.S. Dollar Symbolism
The dollar symbol itself ($) is said to be derived from the previously used ps, which represented the Mexican peso, Spanish piaster, or "pieces of eight." People eventually began to write the 'P' over the 'S,' then a single line over the 'S,' creating the dollar symbol.
There has been a great deal of controversy surrounding the enigmatic symbols on the U.S. dollar bill. For instance, the arrows being held by the eagle on the dollar bill were originally held in the right talon. Arrows symbolize war, and the right side signifies dominance. Some took that to mean dominance by war. In fact, the Founding Fathers used these symbols to convey strong messages; however, they have become garbled over the years.
The dollar bill shows the Great Shield of the United States, which contains:
- The American eagle flying free, holding 13 arrows of war in its non-dominant left talon and an olive branch for peace in its dominant right talon.
- The banner in its beak reads "E Pluribus Unum," meaning “Out of Many, One.”
- The shield's horizontal blue band represents Congress uniting the original 13 colonies, represented by 13 red and white vertical stripes.
- The 13 stars above the eagle represent a new nation or a constellation in the universe.
- Red stands for valor, white stands for purity, and blue stands for justice.
On the reverse of the Great Seal stands an unfinished pyramid of 13 rows, symbolizing strength and duration. The first row reads, "1776" in Roman numerals. The banner below reads "Novus Ordo Seclorum," which means "A New Order of the Ages." This statement refers to a new form of government or "the beginning of the new American Era." The all-seeing eye of the Divine is bordered by the phrase "Annuit Coeptis." This Latin phrase means "Providence Has Favored Our Undertakings."
There are six denominations of coins produced, with the costs to produce them as follows:
- Penny (worth 1 cent): In 2019, pennies cost taxpayers about $68 million.
- Nickel (worth 5 cents): Nickels add about $21 million to the U.S. debt.
- Dime (worth 10 cents): Dimes only cost 3.7 cents each to produce.
- Quarter (worth 25 cents): These costs 9 cents to make and distribute.
- Half Dollar (worth 50 cents): These cost about 6.6 cents to produce.
- Dollar (worth 100 cents): The United States is the only developed country that still uses $1 bills.
The United States no longer produces the half-cent coin, the two-cent coin, the three-cent coin, the half-dime coin (different from the nickel), or the twenty-cent coin.
U.S. Dollar Bills
There are seven denominations in bills still being printed: $1, $2, $5, $10, $20, $50, and $100. There are five larger denominations that are no longer being printed; however, some of these are held by collectors and are still considered legal tender: the $500, $1,000, $5,000, $10,000 bills. The $100,000 bill was never circulated and is not legally held by collectors or consumers.
The pie chart below shows how many bills of each denomination were circulating in 2018. This chart represents the first year that the number of $100 bills circulating was larger than the number of $1 bills.
The Federal Reserve, as the nation's central bank, is responsible for making sure that enough currency is in circulation. It commissions the U.S. Treasury Department's Bureau of Engraving and Printing to print the bills. It also authorizes its Mint Department to cast the coins. Once produced, the currency is shipped to the Federal Reserve banks, where members can exchange credit for currency as needed.
Very few older and current bills have pictures of people other than presidents. The three who were not are Alexander Hamilton, the first Secretary of the Treasury, on the $10 bill; Benjamin Franklin on the $100 bill; and Salmon P. Chase, Treasury Secretary during the Civil War, on the $10,000 bill, which is no longer printed.
Dollar Exchange Rate Conversion
When you travel overseas or conduct any international business, you want to know how much your dollar will buy. To find out, you must convert your currency to the local one by using an exchange rate.
Traders in the foreign exchange market determine the dollar's value as compared to other currencies every moment. The rates are determined by a wide variety of factors: the interest rate paid on the dollar, how rapidly the economy is growing, and how large the country's debt-to-GDP ratio is.
In addition to exchange rates, the dollar's value is measured by U.S. Treasury notes and the number of dollars held in reserves by foreign governments. Countries that export more to the U.S. than they import hold an excess of dollars, which increases the value of the dollar by absorbing the excess supply. This exchange also makes the value of their currency weaker, allowing their goods to seem cheaper. In addition to holding onto dollars, these countries buy Treasury notes, which helps make the dollar stronger.
The value of the U.S. dollar is measured by exchange rates, Treasury notes, and foreign exchange reserves.
The World's Reserve Currency
Part of the reason for the dollar's strength is its role as the world's reserve currency. Most people around the world will accept a $20 bill for payment in lieu of their own country's currency; most oil contracts are in dollars, and 86% of all foreign exchange trade is conducted in dollars.
The dollar's unique status as a world currency is due to the Bretton Woods Agreement, in which the victors of World War II agreed to peg their currency to the dollar and tie it to a fixed amount of gold. President Nixon ended the gold standard in 1973, which allowed the dollar to have a floating value rather than a fixed one.
Disconnecting the dollar from gold had the effect of tying it to the country's economy and the three factors mentioned earlier: exchange rates, Treasury notes, and foreign exchange reserves.
Frequently Asked Questions (FAQs)
How do you check a U.S. dollar to make sure it's real?
How do you short the U.S. dollar?
Shorting the dollar can be as easy as exchanging it for another currency. If you think the dollar's value will fall, then trade your U.S. dollars for another currency that you expect to remain relatively strong. You can also short the dollar index (DXY) or buy an ETF like UDN that is designed to replicate a short DXY position.