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A Brief History of the Dollar

In living through the euro's teething troubles, it's worth remembering the adolescence of the American dollar.

This year's derby between the euro and the dollar is nothing but an extension of age-old trade relationships across the Atlantic, and as unstable as the last few years have been, it's astonishing how little has changed, essentially, over the last three or four centuries.

We think of the U.S. dollar as a single firm currency and the euro as a rickety new experiment in economic union, but the name "dollar" itself is an echo of an earlier union in Europe. The thaler became a general name for money in the Holy Roman Empire after a successful regional coin called the Joachimsthaler was minted using silver from the Joachimsthal, or St. Joseph's Valley, of Bohemia.

The thaler, or German dollar, became such a general currency for trade in the Holy Roman Empire that when Spain introduced the now-legendary "piece of eight," it was weighted for parity with the German dollar — for the same trade-easing reasons the euro was weighted to equal about one U.S. dollar, a few centuries on.

Pieces of eight, or eight-real coins, promptly became known as "Spanish dollars." In the American colonies, they served as hard currency.

The money that grew up in America by the early 1800s was a mess of regional "dollars" regulated by a patchwork of state laws — colorful bank notes intended to equal a Spanish dollar, more or less, but traded according to the strength of the successful, failing or defunct banks behind them. There was so much confusion, according to the Economic History Association, that "magazines ... specialized in printing pictures, descriptions, and prices of various bank notes, along with information on whether or not the issuing bank was still in existence."

EUROPEAN DISPATCHMichael Scott Moore complements his standing feature in Miller-McCune magazine with frequent posts on the policy challenges and solutions popping up on the other side of the pond.

Michael Scott Moore complements his standing feature in Miller-McCune magazine with frequent posts on the policy challenges and solutions popping up on the other side of the pond.

A piece of eight was still common hard currency in those days, so when Washington decided to unify American money with the Federal Bank Acts of 1863 and '64, it guaranteed the new "greenbacks" with Spanish dollars. Abraham Lincoln's national-money project was not just a way to organize trade within the Union, but also a means to finance the Civil War. Regional dollars were taxed out of existence, and a new system of national banks had to buy government bonds to issue the new federal money. Along with the U.S. dollar, in other words, Lincoln created a captive domestic market for Washington's debt.

America still has a captive market for its federal debt because the dollar remains an international reserve currency. U.S. debt, of course, has spiraled out of control since the 2008 credit implosion, which threatens the soundness of the dollar, but as long as other major currencies are also mired in debt, the dollar should enjoy some protection against, say, a Chinese decision to unravel its dollar holdings — something that really could sink the dollar.

A lack of the same basic protection is what threatened the euro this year. Appetite for European debt plummeted when Greece and a few other European governments came close to default. The entire euro zone, of course, is not as weak as its weakest members — German bonds are still healthy enough — but the euro crisis showed what can happen when independent bankers run a currency from one location, Frankfurt, while politicians assemble different budgets from various independent capitals.

Critics have said the euro crisis won't really be solved until the European Union starts to resemble what it (only sometimes) wants to be: a politically unified "United States of Europe." That day is a long way off. The stronger the EU grows, the more Europeans hate it, and every concentration of power in Brussels requires years of debate and political horse-trading. (See the EU constitution debacle.) If the euro, in its current form, only has five or 10 more years, as some experts seem to think, the political changes won't come fast enough.

That's OK — the euro and the dollar grew up in different parts of the world, and they'll follow different fates. But the need for both won't vanish anytime soon.