History of the dollar

Discover the history of the US dollar – including its origins, and the events that led to it becoming the most traded currency on the planet.

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The origins of the dollar

The US dollar (USD) became the official currency of the United States (US) in 1792, but the dollar gbpactually has origins in 16th century Europe. The ‘thaler’, a common name for a Czech coin, became used to describe any similar European silver coin – translated into English, it means ‘dollar.’

The term dollar found its way to the New World during the Spanish colonisation, where the Spanish peso, or dollar, was used in Mexico to back paper money.

The early years of the dollar 

Over the next 400 years, the Spanish dollar became the US dollar that we know today. 

1774

The Continental Congress of the United States was created during the American Revolution. They used the Spanish dollar to back paper money in individual states, known as continental currencies.

1776

The US achieved independence and decided to favour the dollar over sterling, intending to unify monetary policy. Foreign currencies and continental currencies were still in circulation.

1792

The Coinage Act ratified the dollar as the official currency of the US.

1848

The California gold rush increased gold production and devalued silver. The dollar became backed by gold.

1863

The National Banking Act ruled that all other currencies, including the Spanish dollar and continental currencies, were no longer legal tender. The ‘greenback’ paper American dollar bill entered circulation.

1900

The Gold Standard Act set the dollar’s price at 25 and eight-tenth grains of gold.

1913

The Federal Reserve was created to monitor monetary policy and make sure enough currency was in circulation. 

1929

The Wall Street crash launched the US into a decade-long crisis: the Great Depression. Investors begin to hoard gold as a safe haven, causing the dollar to fall by 30%.

1933

President Roosevelt ordered Americans to exchange their private gold for dollars, creating the largest gold reserve in the world – Fort Knox.  

1939

During World War II, the rise in employment and domestic production of goods strengthened the dollar.

1944

The post-war Bretton Woods Agreement pegged global currencies to the dollar rather than gold, essentially making the US dollar the global currency.

1971

President Richard Nixon took the dollar off the gold standard and the dollar’s value became comparable to other world currencies in what we now know as foreign exchange.

The value of the dollar

The dollar had become the de facto world currency and its value needed to be closely protected – any fluctuations would affect global markets, as well as the US. Both domestic and international events, have impacted the price of the dollar, including:

The 1979-80 oil crisis  

From 1979-80, the US/Iran Oil Embargo caused instability that played out on the price of the dollar and created a tenuous situation for foreign investors. As the price of crude oil soared to $36.83, the dollar decreased in value. 

Rising oil prices in 1979-80

9/11

The terror attack against the US on 11 September 2001 caused the dollar to fluctuate, as US stocks lost approximately $1.4 trillion dollars in value – the Dow Jones dropped by 14.3% in one week alone. Foreign investment in the dollar declined, and consumer confidence (often an indicator of a strong dollar) dropped to its lowest level since 1994.  

2008 financial crisis

During the 2008 financial crisis, most global currencies reached extreme lows, but USD was lifted out of a five-year decline. The US dollar index, which measures the dollar against the US’s closest trade partners, gained 15.5% as European currencies weakened. For example, GBP fell sharply against the dollar – from 1.9 to 1.3 – as investors began using the USD as a safe haven.  

2008 financial crisis: GBP falling to its lowest price against USD in five years

2016 election of Donald Trump

When Donald Trump won the 2016 presidential race, the dollar surged against the pound. Investors saw hope in his plans for tax cuts and infrastructure spending, and the dollar rose from 0.79 before the vote to 0.83 after his inauguration in January 2017. But after Trump was investigated for obstruction of justice and failed to deliver on his economic reforms, the dollar fell back to 0.78 in June – lower than before the election.

According to economists, there are over 50 factors that can affect the price of the dollar. Learn more about what moves forex markets

The dollar today 

Is the US dollar still the global currency?

Over all its highs and lows, the dollar has remained the de facto global currency with over 65% of all dollars in circulation being used outside of the US. It is used in 50% of international trade and is included in every major forex pair, accounting for 80% of forex trading. 

More than a third of countries peg their currency to the dollar. While it is no longer backed by gold, it is backed by the largest economy in the world. It is used as the reserve currency of most central banks as a hedge against inflation, and in 2017, the banks of Germany, France and the UK held more liabilities in dollars than their own currencies.

Which countries use the dollar?

The table below shows the five US territories and seven sovereign nations that use USD as their official currency of exchange. 

US Territory or Foreign Country

Relationship with United States

Geographic Location

Gross Domestic Product  (2013)

United States of America

Federal Republic

North America

 $16.8 trillion 

Commonwealth of Puerto Rico

Unincorporated territory of the US

North-eastern Caribbean

 $103.1 billion 

Ecuador

Independent country

North-western South America

 $94.5 billion 

Republic of El Salvador

Independent country

Central America

 $24.3 billion 

Republic of Zimbabwe

Independent country

Southeast Africa

 $13.5 billion 

Guam

Unincorporated territory of the US

Western Pacific Ocean

 $4.9 billion 

Virgin islands of the United States

Insular area territory of the US

Caribbean

 $3.8 billion 

Democratic Republic of Timor-Leste

Independent country

Maritime Southeast Asia

 $1.6 billion 

American Samoa

Unincorporated territory of the US

South Pacific Ocean

 $711 million 

Commonwealth of the Northern Mariana Islands

Unincorporated territory of the US

Western Pacific Ocean

 $682 million 

Federated States of Micronesia

Six Sovereign Countries

Sub region of Oceania

 $316.2 million 

Republic of Palau

Island Country

Western Pacific Ocean

 $247 million 

Marshall Islands

Island Country

Near Equator in the Pacific Ocean

 $191 million

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