What is the US dollar backed by?
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Answer: the US dollar can always be used to pay taxes and buy services from the government. Since everyone needs to do that, the value of the dollar ripples outward from there. But it’s always backed by the fact that you need dollars to obey the law.
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.
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It is backed by a stream of cashflow. The cashflow is 350 million Americans paying taxes forever and ever into the future. The American tax payers are protected by an Army, Navy, Air Force, Marines, and Coast Guard.
The Taxation power of the US government. As long as taxes can be levied on what is the strongest economy in the world, the US will have the strongest currency in the world.
Additionally, this status has given the USD even more power, as international trade sees this stability and takes advantage of it, using it as the medium for exchange. Which also strengthens it.
If you want to know the source of this, look into both the Breton Woods agreement and the 1973 Oil Crisis Resolution. These two events cemented the USD as the staple international currency.
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Theoretically the US dollar should be backed by police, courts, and the only way to pay federal taxes (sure it isn’t perfect with fraud, scams, and such, but for the most part the system does an okay job to fight criminal activity involving money)
Think of the dollar like a mini contracts backed by the US government (and it’s actually owned by the government too, the US dollars itself is technically never truly your money).
If you have a checkbook, an empty check has no value until signed with a dollar domination and the promise that can be exchanged for cash for whatever you’re exchanging it for. Think of dollars like this, but each has a “static” legal promise signed, stamped, and given dollar denomination so it can be of trading something for something, or akin to a gift card that has a permanent balance so you hand over the entire gift card for exchange instead of depleting a balance from it. Each time the card exchanges hands for trade a bit of it’s value is chipped off in the form of taxes (think of the taxes as a fee) and in return you get police and courts in return to help enforce your trade of your dollars.
Another part of a dollar’s value is to make trading of goods and services more convenient, people love convenience and there’s value in that in itself, that’s why money is also often referred to as a tool (and as I already said taxes are the fee you pay to use this tool, this fee helps keep the US government system, police, law, and courts alive). The dollar is like a non-living trusted middle-man escrow exchanging between of goods and service. (e.g. I’ll trade you 30 chickens for 1 cow, but instead of giving you all chickens at ones I’ll give you 30 coupons each signed and stamped by me guarantee you one chicken per coupon and are backed by the courts and enforced by the sheriff to deter me from stealing the cow from you… if you trade and give these chicken coupons to others I will also redeem each coupon for a chicken) then overtime these chicken-coupons become like a form of money.
Yeah, money objectively itself has no value in itself. But it’s rather the legal mini-contract like nature given by the US government behind a functioning US system of police and courts to help enforce trading goods and services using the US dollars that helps give it value.
All this stuff about “belief in the economy” is too vague.
The US dollar is backed by two very specific beliefs:
* if you try to make your own US dollar bills, the US government is going to fuck you up, no matter where you are in the world
* if you don’t pay your US taxes with US dollars, the US government is going to fuck you up
That’s it. Americans need dollars to pay their taxes. People from other places who do business in America need dollars to pay their taxes. People elsewhere, who don’t have to pay US taxes, know that there are plenty of other people who do and will thus be happy to trade for them.
Fear, the USA is the biggest worldwide bully. When it falls the history books will not be nice.
The official answer is that is back by the US government and it’s stability.
The more pragmatic answer is that it is backed by everyone who is willing to trade goods for it.
YOU BACK the US dollar. Along with your neighbor and a good chunk of the world who believes it to be valuable.
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