What is the US dollar backed by?
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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).
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