Value of a Dollar

Have you ever thought about why money is worth anything?

It's just paper and ink or a small piece of stamped metal, but we use it to buy food, a movie ticket, a pair of jeans, a car, a house, just about everything.

Before we had money to pay for things, people would barter, that is, they would trade different items with one another.  For example, someone who owned chickens might need a pair of shoes, so they would offer the shoe-maker a chicken in return for the footwear.  But it’s hard to carry around a bag of chickens to trade for things, and it’s also hard to get everyone to agree on what a chicken is worth.

So, along comes money.

Money is thought to have been invented in China.  Some of the earliest known coins were made in the kingdom of Lydia, which was located in the western part of the country we know as Turkey.  Long before there were coins or paper money, some societies used beads or shells.  The cowrie shell is the most widely and longest used type of money in history.

Deciding what money is worth has been a long process, historically.

Since 1792, the basic unit of money in the United States has been the dollar.  For many years, the value of a dollar was set by law to be equal to a certain amount of gold, and this is what is called the “gold standard.”  For several decades, silver was used as well, both in actual coins and in some bills, called “Silver Certificates,” that could be redeemed for actual silver.

Since 1971, however, the United States dropped the gold standard, and the value of the dollar since then has been determined by several economic factors.

One of those in inflation, a term describing the increase in the costs of things we buy over time.  For example, 50 years ago, the income people earned and the prices they paid for things were much lower than today.  In 2013, you would have to pay $750 for something that, in 1963, would have only cost $100.  However, in 1963, a typical family would have an income of about $6,000, while in 2013 that would be closer to $50,000. 

In 1970, you could buy a new car for $3,900. The average price of a new car today is $29,817. To learn more about inflation, you can check out the Department of Labor's inflation calculator.

Another factor is the exchange rate, which is the value of a dollar compared to another country’s currency.  For example, pound, the basic unit of money in Great Britain, is worth $1.60, while the yen, Japan’s currency, is worth a little more than one of our pennies.

If you have ever traveled to a foreign country, you would find other countries have money that looks different than ours here at home. If you take your US dollars to Canada and exchange it for a Canadian dollar, you will receive a different amount of Canadian dollars and this is called the exchange rate.

Managing our money in this complex environment is the job of the Federal Reserve Bank, the central bank of the United States, which backs our money and works to keep our financial system stable.