It all began with the Coinage Act of 1792, which established the dollar as the standard unit of money in the United States. This act also created the U.S. Mint, responsible for producing and circulating coinage.
Initially, the dollar was defined under a bimetallic standard, meaning it was backed by a fixed quantity of either silver or gold. However, in 1900, the United States formally adopted the gold standard, which lasted until 1971, when the dollar’s link to gold was eliminated by then-President Richard Nixon.
The dollar’s design and issuance have evolved significantly over time. For instance, during the American Revolutionary War, the Continental Congress issued paper money known as Continental currency. Unfortunately, this currency quickly lost its value due to inflation.
In 1913, the establishment of the Federal Reserve System marked a significant change, as the dollar began to be issued primarily in the form of Federal Reserve notes. The dollar further solidified its global importance after World War II, becoming the world’s primary reserve currency through the Bretton Woods Agreement of 1944.
Today, the U.S. dollar is not only the official currency of the United States but also the dominant currency in international trade and finance. A basic mathematical truth is that our money supply growth should be closely tied to our economic growth, that is, gross domestic product. The U.S. Federal Reserve, however, has had the flexibility to increase the money supply well beyond economic growth, leading to inflation and the depreciation of the purchasing power of our currency.
During world wars, for example, the money supply, along with national debt, was vastly increased to fund the war effort. And the economic disasters of the financial crisis of 2008–09 followed by the pandemic of 2020 took our national debt all the way back up to world war levels (see chart).
The monetary and fiscal generosity seemed free as the money flowed into needy bank accounts, but the cost was twofold: inflation and debt. To tame the inflation, the Fed raised interest rates to cool the economy. But that meant the cost of servicing the debt increased significantly in terms of interest rates on homes, cars, loans, and credit cards. The purchasing power from the excessive money supply meant that the dollar bought fewer and fewer goods and services over time (see chart).
Equally important to note is that the U.S. dollar is slipping in its rank among world reserve currencies, today down to 59 percent (see chart).
Here Are 8 Ways to Invest in a Falling Dollar
1) US Companies Generating International Sales
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- Multinational corporations: Look for large U.S. companies that operate globally. These companies often generate a substantial portion of their revenue from international markets. Examples include Apple, Coca-Cola, and Johnson & Johnson.
- Exchange-traded funds (ETFs) and mutual funds: These funds can provide diversified exposure to U.S. companies with significant international sales. Some ETFs and mutual funds specifically focus on multinational corporations.
- American depositary receipts (ADRs): While ADRs typically are used to invest in foreign companies, some ADRs represent shares of U.S. companies with extensive international operations.
- Research and analysis: Use financial news, company reports, and investment analysis tools to identify U.S. companies with strong international sales. Websites such as Investopedia and Morningstar offer valuable insights.
2) Commodities
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- Diversify with a broad basket of commodities: Investing in a variety of commodities, such as metals, energy, and agricultural products, can provide a natural hedge against inflation. As prices of these commodities rise, they can help offset the impact of inflation on your portfolio.
- Gold: Often considered a safe haven, gold is a popular choice for hedging against both inflation and geopolitical instability. It tends to retain its value over time and can be a good store of wealth.
- Commodity ETFs and stocks: You can invest in commodity ETFs or stocks of companies involved in commodity production. These investments can offer exposure to commodity prices without the need to directly purchase physical commodities.
- Energy commodities: Investing in energy commodities such as oil and natural gas can also be beneficial. These commodities often see price increases during inflationary periods, which can help protect your purchasing power.
- Agricultural commodities: Products such as wheat, corn, and soybeans can also serve as a hedge. As food prices rise, investments in these commodities can provide a buffer against inflation.
