What is the US dollar backed by?
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It is backed by the belief of the US gov’t’s continued stability, the US economy’s continued growth and productivity, and that other people who view the world rationally also have the same belief (and therefore accept the US dollar as payment).
Confidence that the largest and most diverse economy in the world is generally stable. That’s all. The US dollar is considered reliable because it simply cannot change in value very fast due to all the economic momentum the US economy has.
Several things:
– Trust in the US government. Both that they won’t go mental printing US dollars, and will generally manage the currency well.
– Trust in the US economy. If the US economy suddenly went to shit and collapsed, the value of the dollar would collapse. If that was liable to happen, the value of the dollar would fall in anticipation. It doesn’t look liable to happen anytime soon.
– US exports. The US exports a bunch of stuff, which means dollars being bought for other currencies. This is part of the economy, but also a key part of it.
– Men with guns. Lots of people have to pay taxes to the US government. Those have to paid in US dollars. If you don’t, eventually some guys with guns will come and take you, your things, or both away (at least if you’re in US jurisdiction). So, people pay their taxes in US dollars, which makes them valuable.
– Expectations that other people will continue to accept the currency. This is a big one, and built off the back of the all the other reasons and itself. Yup, part of why people expect it to work is people expect it to work.
To quote economist economist Adam Tooze, the US dollar “is backed by everything” – or maybe more importantly (he adds) everyone that matters. The rich and powerful, the US government, big corporations, many other countries and international institutions all have an interest in the continued stability and use of the dollar. (I’m sure the same is true of all major currencies.)
Like all fiat currencies, it’s backed by the government, but USD also has an added stabilizing factor in the form of oil trade, nearly all of it is traded in dollars, providing stability well beyond what US economy alone could. The meme about about US going to war to extract oil isn’t accurate, but it does contain a kernel of truth as US is very aggressive about maintaining the petrodollar.
All fiat currency is backed by the future earning potential of the issuing nation’s economy through the productivity of its people.
It’s no different than your mortgage, car loan, or credit card debt being backed by your future earning potential as a worker.
By my belief that someone tomorrow will accept a dollar for what I consider something like a dollar’s worth of goods or services. By your belief in the same thing. By the similar beliefs of every hand that that dollar passes through.
It’s backed by various merchants who accept dollars in exchange for goods and services. This includes the government of the US
Since words like “the economy” don’t really say much, I think it’s clearer to say the US dollar is backed by the total number of desirable goods and services provided by providers who are willing to accept US dollars. In economics we would call that aggregate supply.
This is also bolstered by the fact that the US government is willing to accept taxes in US dollars, which means that those providers of goods and services need dollars in order to pay their taxes. I’m personally less sold on this last point, but I think experts tend to agree this is a big part of what makes a currency valuable.
I think this way of thinking about value also provides a more accurate impression of what causes inflation. People seem to think it’s only when the money supply goes up, but that’s only half the story. Inflation happens when the amount goods that people want to buy and are able to buy at a certain price level (aggregate demand) is more than the amount of goods supplied by people who accept US dollars as payment (aggregate supply).
You are required to pay taxes in USD if you pay taxes to the US gov’t. This creates a stable demand for USD. Americans want to be payed in USD so they can pay the taxes to their gov’t which pressures employers to pay in USD. If you are a British company but want to have access to skilled american labor…you have to get USD to give to your employees. The USA being involved in nearly every economy in the world spreads this USD pressure around.
Any Gov’t currencies work because citizens in that gov’t agree to use that as the medium of exchange for value. Then if foreign actors want to access that labor force they have to acquire that currency.
Currency is just an IOU and it’s value is derived based on if you can actually cash it in.
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