How is it that United States currency is worth anything at all?

Question

What is it backed by?

Answer 1

Those of you that think it's a "bad" system do not understand money, which is one of history's great inventions. It is an abstract thing that allows us to collect the value we create for others, and then serves as a medium for storing that value and exchanging it with others -- because people need something that serves those functions. (Just try living without it).

Currency is a tangible thing that represents money, it allows us to USE money. Since money is an abstraction, it is not sensible to attempt to "back it" with some commodity -- though people have only come to understand that in the last century or so, and many people still do not understand this. Money is not gold, and gold is not money. Money has absolutely no meaning in the absence of human society; an ounce of gold is still an ounce of gold regardless.

Currency has value for the same reason anything else does: supply and demand. People need it so there is a demand (again, just try to live without it). There are entities meanwhile that control the supply. Before the Fed Reserve did this in the U.S., individual banks issued their own paper money and controlled the supply.

As long as authorities can control the supply, and as long as there is still demand, currency will continue to maintain value just as legitimately as all the gold or diamonds in the world.

Answer 2

It is backed by your willingness to use it. Even backed currencies must have someone willing to use them. During the 19th centuries American currency would be discounted even in the United States when the banking system was under stress. I believe the discount in 1837 was 90% of face value. If you are not willing to use it, it does not have value.

Further, the gold system is what brought about the Great Depression. That is why backing in metal was abandoned in every major economy except Switzerland. Backing money in metals has two problems. First, it creates dangerous rigidities in the economies. These rigidities were not so bad in an agricultural setting because once you plant your crop, national production is nearly fixed and so other rigidities naturally exist and large booms and busts were common. Still, the system provided confidence to farmers and foreign buyers.

The second problem is that it isn't necessary to be backed. You obviously accept it without backing so why add the stress to the economy by backing it with a metal.

Money is a machine that is neutral. It exists to facillitate trade and to the extent it does that it is valuable. The banking system exists to maintain the neutrality of money so it does no damage to commerce and therefore lose its value.

Answer 3

United States currency is an IOU. In this country, we used to be able to redeem our currency for gold (until 1933) and silver (until some time later). U S currency is only backed by the government's WORD that they'll honor it. U S currency is only worth the materials it's made out of (copper, zinc, nickel, paper, etc). These materials have little value in and of themselves.

Answer 4

The first answer is correct. However, to elaborate, even though the US currency is no longer backed by gold or silver, it is far more valuable than any other currency.

The reason, the Unted States has never failed to pay a debt. That is why the hundred dollar bill is the most widely held form of money world wide.

Answer 5

well, all other OECD countries in the world are yet to fail to pay a debt. And given that at any point in time a country will have debtors how do you know if a country will default or not?

The US has weaknesses in terms of massive private sector debt, a dodgy property market and declining competitiveness, but it ain't going to go down the toilet overnight.

Answer 6

$ value is based on faith. We believe in money so there for its worth something. We believe diamonds are worth something and it has very little "real value" yet its the simble of wealth.

Answer 7

As long as we all think it's good it is. Paper tender is an iou from the gov. to me an you. terrible as it seems it works.

Answer 8

its backed by gold