What Is a Dollar?

In Part One, we asked who owns the Federal Reserve. Congress created it, and private banks cannot own it the way shareholders own a company.

Now we turn to the dollar itself. What is it, who creates it, and what stands behind it?

Across the top: Federal Reserve Note. Nearby: legal tender for all debts, public and private.

A dollar is the unit we use to name a price. This bill is one form of money measured in dollars. The balance in your bank account is another.

Federal law calls the note an obligation of the United States, redeemable in lawful money. Today, you can exchange it for other United States currency. You cannot demand gold, silver, or assets held against the note.

Legal tender concerns debts. Federal law generally lets shops decline cash for a new purchase, although state and local rules can differ.

The bill gives you money to use, rather than a fixed amount of precious metal. What it buys can change. To see how we got here, start with the Civil War.

Soldiers needed food, uniforms, transport, and weapons. Lincoln's administration faced mounting bills that taxes and ordinary borrowing alone struggled to meet.

In eighteen sixty-two, Congress authorized United States Notes: the greenbacks. They paid no interest and became legal tender, with exceptions for customs duties and interest on federal obligations. Alongside taxes and borrowing, paper money helped finance the war.

During the war, holders could not exchange greenbacks for gold on demand. A dollar in paper could buy less than a dollar in gold. That gap shifted with the supply of paper and confidence in the Union's finances and military prospects.

The Constitution restricts states themselves from issuing paper money or making anything other than gold and silver coin legal tender for debts. Congress has separate monetary and borrowing powers. The Supreme Court later upheld federal paper legal tender.

After the war, these currencies continued side by side. In eighteen seventy-nine, the Treasury began redeeming greenbacks in coin at face value. National banknotes, certificates, coins, and greenbacks overlapped as railroads, factories, and cities expanded.

Money had to reach more places, often at short notice. Banking panics exposed a system that struggled when people wanted cash together. After the crisis of nineteen hundred seven, reform gained urgency. Americans argued over who should control the new system. Congress created the Federal Reserve in nineteen thirteen; its notes joined the other currencies the following year.

During the banking crisis of the nineteen thirties, the government ended domestic gold redemption. Later, industrial demand and silver's market value put pressure on Treasury supplies. Congress phased out new silver certificates; their redemption ended in nineteen sixty-eight.

Foreign monetary authorities could still exchange dollars for gold at the official price. As dollar claims grew against America's gold stock, that arrangement came under strain. In nineteen seventy-one, the United States suspended that conversion.

Congress authorized Federal Reserve notes. Only the Federal Reserve can issue those notes; that is different from creating all the money we use.

The Federal Reserve Board orders new currency. Treasury's Bureau of Engraving and Printing manufactures it. Reserve Banks distribute it through banks to the public.

The order reflects expected demand for cash, available stocks, and how many worn notes need replacing. Printing a replacement for a destroyed bill does not itself add to the currency outstanding. Printing more bills is also different from authorizing government spending. Congress provides that authority through law, not through a print order.

Much of our money exists in accounts. Commercial banks create deposits when they lend, giving borrowers money they can spend and a debt to repay. Banks must judge repayment prospects, have resources to absorb losses, and be able to meet payments.

That money can pay workers and buy materials. It can help put unused resources to work. But an account balance cannot build a house, grow food, or deliver a finished product. Those require people, equipment, materials, and time. When spending grows faster than the supply of goods and services, prices can rise. More dollars alone cannot guarantee that we have more to buy.

Who decides what borrowing costs—and who pays when prices rise? That's Part Three. Subscribe on YouTube to Verum et Res for the next chapter.