What is the US dollar backed by?

Question

What is the US dollar backed by?

In: 2582

Answer 1

There’s actually an interesting history here. Up until the 1970s, it was backed by gold (with the exception of a few time when the economy was bad and more money needed to be printed than we had gold for)

Currently it isn’t backed by anything. This is what’s called fiat currency. It has value because everyone agrees it does. And every other currency (with a few minor exceptions, not significant enough to go in to) is backed by the US dollar.

Now why is every currency backed by the US dollar? It’s because of how stable it is. Well why is it stable? When World War 2 happened, all of the major powers of the world (except the US) spent so much of their money fighting the war, that they had very little in gold reserves, so they switched to fiat currency to temporarily boost their cash reserves with the idea that when the war is over, they can slowly recover their gold and move back to the gold standard.

Well World War 2 was massive, so there’s all of these world powers with no gold, and the US with tons of it. So they collectively make the decision, instead of each individual country getting back on the gold standard after years of recovery, they would all just back their currency with the US dollar, which is backed by the gold standard. This way, everyone is on the gold standard with extra steps.

Now, the other nations still planned on getting back on the gold standard, so over time, as their economies recovered, they would exchange their currencies for USD and then gold and take the gold back home. By the 70s, the US realized this was draining their gold reserves and it was going to be a problem eventually, so we were taken off of the gold standard.

To be clear, no one knew if this was going to work. People were concerned this would tank the world economy, but here we are 50 years later and still going strong.

Some people may argue that USD isn’t a true fiat currency, because it was decided that only USD would be accepted as payment for oil (this was actually done as a result of taking USD off of the gold standard) but thats still up for debate by people who know more about it than me.