What Is USD (United States Dollar)? Definition, Uses, Importance

What Is the USD (United States Dollar)?

The USD (United States dollar) is the official currency of the United States of America. The United States dollar, or U.S. dollar, is made up of 100 cents. It is represented by the symbol $ or US$ to differentiate it from other dollar-based currencies.

The U.S. dollar is considered a benchmark currency and is the most used currency in transactions across the world. In addition, it is used as the official currency in many territories outside of the U.S., while many others use it alongside their own as an unofficial currency.

Understanding the USD (United States Dollar)

The United States dollar, often referred to as the greenback, was created through the Coinage Act of 1792, which specified that a dollar of currency would be equal to between 371 and 416 grains of silver, and an "eagle" (US$10) at between 247 and 270 grains of gold. Gold coins with an equivalent weight were used as measures in this system. This would help ensure that the purchasing power of the dollar would be equal to the purchasing power of gold or silver at that time.

The first greenbacks were issued as demand notes to finance the 1861 Civil War against the Confederacy. They were referred to as "greenbacks" because they were green in color. Legal tender known as "United States Notes" was first issued in 1862 and a centralized system for printing the notes was first established in 1869. Non-interest bearer notes continued to gain in popularity across a system of competing local currencies with the establishment of a national banking system and establishment of the Federal Reserve system in 1913.

USD (United States Dollar) and Gold

The USD's relation to gold and its eventual delinking had a lengthy process. In 1933, when the government stopped the conversion of notes into gold, gold was required to be given to the federal government at a price of $20.67 per troy ounce. The price was allowed to rise to $35 by January 1934. The dollar was devalued in terms of its gold content and only allowed to be done so for international transactions. By the 1960s, this partial gold standard became difficult to maintain.

In 1968, the requirement to hold gold reserves against Federal Reserve notes was repealed. In 1971, the U.S. announced it would not freely convert dollars at the exchange rate with gold. In 1972 and 1973, the dollar was fully devalued against gold. In October 1976, the definition of the dollar in terms of gold was officially removed from statute and the USD and gold no longer had any link.

USD's (United States Dollar's) International Role

The U.S. dollar is the most traded currency in the world. According to the 2022 Triennial bank survey conducted by the Bank of International Settlements, the US dollar was on the side of 88% (out of 200% because of two-sided currency pairs) of all foreign-exchange trades.

The euro was a distant second with 31% of all transactions. The reach of the U.S. dollar has resulted in its own index, the USDX, which is a weighted value index against a basket of six other currencies; the euro, Japanese yen, British pound, Swiss franc, Swedish krona, and the Canadian dollar.  

Furthermore, the U.S. dollar is the official currency of many U.S. territories, including Puerto Rico, Guam, and the U.S. Virgin Islands.

The Changing Role of the USD (United States Dollar)

There is a continuous discussion on if the international role of the USD is becoming less important over time. The rise of the euro and China's increasing presence in the global economy all feed into this idea.

However, this remains to be fairly unsubstantiated and the strength of the dollar in international markets remains strong according to a variety of studies, particularly because of the stability of the U.S. economy and its large size, the current widespread use of the currency, and the pricing of oil and other commodities in USD.

The Bottom Line

The USD is the most widely used in international transactions, as well as the one considered to be the safest store of value. A small but perfect example of this is how the USD is accepted as a means of currency in many emerging market nations when the USD is by no means used as the currency in that nation. Many vendors or shops will gladly accept a U.S. dollar instead of their local currency.