Currency gyrations have the biggest impact on international trade, making imports cheaper and exports more expensive. Over time, a stronger US dollar will serve to widen the trade deficit, which will gradually exert downward pressure on the greenback and pull it lower. Conversely, sales and earnings for numerous US multinationals that sell their products and services globally would be affected by the stronger dollar. Pharmaceuticals and technology are two sectors where US firms have a major presence around the world, so they are substantially affected by a rising greenback. The Legal Tender Act was passed on 25 February 1862, which permitted the Secretary of the Treasury to issue Legal Tender Notes, which looked very similar to the Demand Notes they replaced, only they were not redeemable for coin.
Such overseas demand is a factor in keeping long-term US interest rates low, which in turn helps stimulate the economy. Note that a stronger dollar also keeps a lid on “imported” inflation, which makes the case for a rate hike by the Federal Reserve less compelling. The term “greenback” is a slang word for the United States Federal Reserve Note, commonly referred to as the US Dollar (USD). Greenbacks also have a historical connotation, however, referring to the debate over economic policy throughout the Civil War Era.
In 1874 champions of an expanded currency formed the Greenback-Labor Party, which drew most of its support from the Midwest; and after Congress, in 1875, passed the Resumption Act, which provided that greenbacks could be redeemed in gold beginning Jan. 1, 1879, the new party made repeal of that act its first objective. In the midterm elections of 1878, the Greenback-Labor Party elected 14 members of Congress and in 1880 its candidate for president polled more than 300,000 votes, but after 1878 most champions of an expanded currency judged that their best chance of success was the movement for the unlimited coinage of silver. The party’s name referred to the non-gold backed paper money, commonly known as “greenbacks”, that had been issued by the North during the American Civil War and shortly afterward. The party opposed the deflationary lowering of prices paid to producers that was entailed by a return to a bullion-based monetary system, the policy favored by the Republican and Democratic parties. Continued use of unbacked currency, it was believed, would better foster business and assist farmers by raising prices and making debts easier to pay.
A European luxury sedan that cost $70,000 when each euro fetched 1.40 dollars should cost $57,500 if the dollar subsequently appreciated and the euro was now worth only 1.15 dollars. The stronger dollar also makes US exports more expensive, so a surfeit of domestically-produced goods should translate into lower prices as well. Foreign portfolio investment (FPI) into the US may also increase during a period of dollar strength, as it generally coincides with a robust US economic expansion.
- Before the Civil War, the United States used gold and silver coins as its official currency.
- The term “greenback” is a slang word for the United States Federal Reserve Note, commonly referred to as the US Dollar (USD).
- Cheaper consumer goods would result in more disposable income for Americans, and thus more money to spend on fun things like shopping, eating out, entertainment, and vacations.
- Pressure began to build in the financial industry for a rectification of the weak currency situation.
At the time, Demand Notes were supposed to be redeemable for gold coin “on demand,” which was a problem for the government. As the government issued hundreds of millions in greenbacks, their value against gold declined. The decline was substantial, but was nothing like the collapse of the continental dollar. In the 1860s, the U.S. created over $400 million in legal tender to finance its war against itself.
However, due to the size of the issue—$400 million—the value of greenbacks against gold steadily declined. The stronger dollar gives the biggest advantage to companies that import most of their goods but sell domestically, since their top-line and bottom-line benefit from robust domestic demand and lower input costs. Consumer spending accounts for approximately 70% of the US economy, and a stronger dollar is a net benefit for this prime driver of the economy. It makes imports cheaper, so everything from noodles to luxury automobiles should cost less.
Congress had limited taxing authority, and used paper currency to help finance the civil war. Pressure began to build in the financial industry for a rectification of the weak currency situation. The history of the greenback came full circle when Republican president Richard Nixon abandoned the gold standard in 1971 by preventing foreign countries from trading gold for United States dollars. At this time, Legal Tender Notes were replaced by Federal Reserve Notes, or what is now used as paper money. This paper money continued the tradition of using green inks, thus retaining the nickname “greenback.” Federal Reserve Notes went through a redesign beginning in 2003, and as a result only the $20 bill still uses green as its main color.
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The idea of issuing paper money was opposed by bankers because it would bring the federal government into markets and could potentially translate to its bankruptcy if the war failed to go in its favor. To prevent such an eventuality, the paper money’s value depended on the health of the individual banks issuing the currency. The stronger dollar also makes it cheaper for US companies to invest overseas, either in physical assets or foreign entities, leading to higher capital outflows. Cross-border mergers and acquisition activity by US companies may rise during a period of dollar strength, especially if it occurs when US capital and equity markets are near all-time highs (since American firms can use their high stock prices as currency for acquisitions), as was the case in early 2015.
economic crisis and response
Greenback movement, (c. 1868–88), in U.S. history, the campaign, largely by persons with agrarian interests, to maintain or increase the amount of paper money in circulation. Between 1862 and 1865, the U.S. government issued more than $450,000,000 in paper money not backed by gold (greenbacks) to help finance the Union cause in the American Civil War. After the war, fiscal conservatives demanded that the government retire the greenbacks, but farmers and others who wished to maintain high prices opposed that move. In 1868 the Democrats gave partial support to the Greenback movement by endorsing a plan that called for the redemption of certain war bonds by the issuance of new greenbacks.
Cheaper consumer goods would result in more disposable income for Americans, and thus more money to spend on fun things like shopping, eating out, entertainment, and vacations. Specific sectors of the economy that would benefit from this spending spree include retailers, restaurants, casinos, travel companies, airlines, and cruise lines. Stronger domestic demand also helps lessen the detrimental impact of a strong dollar on the US tourism industry, as the number of overseas visitors declines significantly because the higher greenback makes it more expensive to travel to the US and vacation there. The government backed this currency and stated that it could be used to pay back public and private debts. Perhaps the most direct impact of a rising greenback is its adverse impact on corporate earnings. This was a major reason why the S&P 500 had its biggest decline in a year in January 2015.
The word “greenback” was a negative term because these notes did not have secure financial backing and banks were reluctant to give customers the full value of the dollar. In early 1888, it was not clear if the Greenback Party would hold another national convention. The 4th Greenback Party National Convention assembled in Cincinnati, Ohio, on May 16, 1888.
It took half a century to get all foreign coins and competing state currencies out of circulation, but by the early 1800s, the U.S. was ready to try the paper money experiment again. Bank notes had been in circulation for a while, but because banks issued more notes than they had coins to cover, these notes often traded at less than face value. For instance, most global commodities are priced in US dollars, so a stronger greenback may reduce overseas demand and thus affect revenues and profitability of US resource producers. Manufacturing companies are hit especially hard by the rising dollar, as they have to compete in a global market and a domestic currency that is even 5% stronger can have a considerable impact on their competitiveness.