The US Dollar (USD)

by admin on July 5, 2011 3:04 pm

The US Dollar (USD)THE UNITED States Dollar or USD for short is the world’s top benchmark currency and the most widely accepted monetary unit that is used in nine out of 10 currency transactions. It is the official monetary unit of the United States of America although dozens of other countries use the USD as their official currency while several more adopted it as their unofficial currency.

Among the countries that use the USD as their official currency are El Salvador, East Timor and Ecuador. In addition former US territories such as the Marianas, Palau and the Micronesia Federation still use the US dollar despite having gained their independence many years ago while dozens more states peg the value of their currencies to the USD.

Known by its symbol “$” or US$ to distinguish it from other countries using also the term ‘dollar’ and similar signs for their own currencies, the USD is also the pricing currency for most of the world’s vital commodities such as petroleum, precious metals like gold and silver and other similar products. It is composed of 100 units called cents although unknown to most people, one USD can also be broken down as 1,000 mills. However, the practice of the using the mill as a unit is not widespread and it is used primarily in taxation accounting and other official purposes.

As the most preferred global reserve currency, most institutions, conglomerates and governments hold substantial quantities of USD as part of their foreign exchange reserves, allowing them to purchase needed commodities without excessive transaction expenses. In addition, institutional lenders and organizations tend to give favorable terms and interest rates to states and companies holding large volumes of US dollars as the USD is still considered as the most stable & reliable currency.

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Despite the recent financial woes of the United States, the USD still remains as the world’s currency standard. As the basic monetary unit of the world’s largest economy managed by the most stable government and protected by the most powerful military, the US dollar is expected to be traded and used extensively by most of the economies for years to come.

Origins of the USD

The Coinage Act passed by the United States Congress in 1792 gave birth to the USD. The law mandated the ‘dollar’ to be the official monetary unit of the United States along with the creation of the United States Mint, the authorized agency to produce coins for circulation in the country.

The name ‘dollar’ can be traced back to the German word “Taler”, a shortened word which referred to Joachimstaler, silver coins that were minted in the 1500s by a Bohemian noble who sourced silver from a valley called Joachimstal in the present day Czech Republic.

The value of the newly-created USD currency at the time was pegged by the Treasury Department to the Mexican peso on 1 dollar to 1 peso basis and should be equal to 371 and 416 grains of silver. The 1792 Coinage Act also designated the ‘eagle’, equal to 10 dollars, as another unit legal tender unit for payment of debts, products and services with a set value of 247 to 270 grain of gold. The actual silver or gold value of the issued dollar or eagle was then converted to the equivalent value of goods and services at that time.

For several decades, the US dollar was strictly based on the specifications set by 1792 Coinage Act until 1834 when the US government decided to set the USD to gold at 23.2 grains per 1 USD coin. In 1862, paper currency was issued for the first time to help the government finance the civil war.

In 1900, the US government dropped silver from one of its benchmark metals and set the USD on gold set at 23.22 grains per USD. By 1933, the use of gold coins was discontinued and in 1970s, the USD was officially taken off the gold standard and allowed to float freely.

The USD Sign

There have been different versions on how the USD sign “$” came to be adopted. Many historians attribute the symbol’s origins to the Straits of Gibraltar also known as the Pillars of Hercules appearing in the Spanish coat of arms that were stamped on Spanish coins or Spanish dollars as they were called, wherein the two columns wrapped by a scroll (or cloth according to some scholars) in the form of a letter “S”’. The two pillars are represented in the USD sign as two vertical lines or bars with the scroll or the S in the middle.

USD Issuance and Production

USD notes are issued by the central bank of the United States also known as the Federal Reserve depending on the need as it purchases and sells Treasury securities in the open market as part of its monetary policy and operations. However, the actual paper money is printed by the Bureau of Engraving and Printing while the coins are still produced by the United States Mint upon the request of the Department of Treasury who takes the Federal Reserve’s order to produce the USD.

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