Sponsors
Till the 1970s, the value of US dollar was determined by the intrinsic value of the coin. From the early days, gold and silver coins were used to make US dollar coins. The value of US dollar was based on the weight of gold or silver that was used to make the coin. Thus, when the value of gold and silver metal fluctuated because of demand or supply changes, the value of US dollar also changed.
In 1971, the gold deficit became so huge that US was forced to default on its commitment of issuing gold against dollars. This led to the establishment of US dollar as a fiat currency and the value of US dollar was no longer dependent on gold or silver that it was made of. The minting of dollar notes became very prevalent and Federal Reserve guaranteed the value of a dollar to the bearer.
Post 1971, US dollar established itself as the primary currency for trade of oil all across the world. This led to a change in the value of the US dollar as the demand increased. This was because any country wanting to import oil needed US dollars to do the trade. The value of the US dollar thus became heavily dependent on the demand for oil.
Also, a major determinant in the value of the US dollar is the reserves of US dollar that is kept by many central banks to maintain their exchange rate. Since US dollar is the most popular currency, most central banks choose to keep foreign exchange in terms of US dollars. Thus, it can be seen that when the demand for foreign exchange is high, the US dollar becomes stronger with respect to other currencies and its exchange rate rises.
There are many parameters which are used to calculate the relative value of US dollar over the years. Some of the important ones are the Consumer Price Index, the GDP deflator, the unskilled wage rate, the GDP per capita and the GDP of the nation. Using one or more of these parameters, you can very well estimate how the value of US dollar has changed over a period of time. Some of these parameters look at the relative price of a same bundle of goods while others look at the cumulative produce of the country over the years, still others would consider the changes in the wage rate to calculate how the value has changed. One can find out the relative value of US dollar at the website http://www.measuringworth.com/uscompare where you have the option to choose which parameters you would like to use for the calculations.
Thus we can see that the value of US dollar is dependent of a lot of factors, economic, political as well as social.
Leave a Reply
You must be logged in to post a comment.