Why is U.S money worth something to people?

Question

I realize how inflation works but is there a simple explaination on why the dollar is valuable to us and other countries? Is it some how backed by our economy?

Answer 1

Anything can be money, really. As long as there is a relatively fixed amount of it, and we all agree to trade goods in it, then that's it.

I have a watch, you will give me 6 widgets for it, I take those widgets and buy an orange, which is sold for a widget each. Everyone prices their products in widges, and as long as well agree to trade in widgets, we are fine.

But who gets how many widgets to start and how do I price in widgets if I don't know what others will price in them? That is why money usually begins with a product that is already being traded. Gold was used because it was rare and highly prized, especially by those in the upper classes who were the only ones buying much.

Dollars were originally notes of credit backed by gold, as by then gold was money for most. Soon people traded the dollars, then dollars became money.

I think it is confusing to say that our dollar is backed by our economy, it implies that the dollar has a store of value which it does not have. When you say something is 'backed' by something else, it implies that something else is a support, is strong. But the dollar could become worthless overnight if the federal reserve printed twice as much currency. Or the dollar could be twice as strong if the Fed caused a recession.

Answer 2

The dollar paper itself is not worth anything, but it is used as money, because we have a relatively limited supply of dollar bills. If dollar bills would be like tree leaves, then each year we would have more and more dollars, and as a result, the value of each bill would go down very rapidly. One year you could buy a cheese cake for $7, the next year it would cost $20, and the third year the same kind of cake would sell for $55. This would be a very rapid inflation, and it would not be good for people.

Since the government is the only organization that has authority to reproduce dollar bills, the supply of dollar bills is LIMITED BY THE US GOVERNMENT. Thus, the government can set the value of the US dollar. The US dollar is worth what it is worth because the government limits its production and people believe that the US government will not allow faster money printing than what is necessary to keep inflation at a moderate level. Moderate inflation is when the cheese cake costs $7, and $7.25 the next year, $7.55 the third year, etc... This kind of inflation is good for the economy and still not too bad for people.

In the end, people's faith in the US government is what gives value to the US dollar (not faith in the economy, but faith in the government). This faith means people believe that their government is POWERFUL TO STAND and WILLING and ABLE to limit production of the US dollar.

Therefore, if there's a government that 1) loses power, or 2) gets a new leader who is financially irresponsible, or 3) somehow becomes unable to limit the reproduction of the currency, then the currency falls (if it has a paper currency backed by the gov). The currency's value is also influenced by what people think. If people think that a country is going to be defeated, then it's currency will fall BEFORE it is ever defeated because the people of the country lost faith in their government.

Currently, the United States of America is one of the most powerful nations on earth, therefore the US dollar is worth more than what it would be worth if it were a tiny weak loser country.

"The currencies of dominant military powers tend to stand at a premium relative to the interest rates and trading position that would otherwise determine their value."
-- The Great Reckoning by James Dale Davidson & Lord William Rees-Mogg

See Also:
What can cause inflation?
http://answers.yahoo.com/question/index;_ylt=AlzGCUBbOoRvZ_KK.xqtGKPty6IX?qid=20070518155936AAtBujQ&show=7#profile-info-xqmM7bMKaa

Answer 3

all money in the U.S. is backed by an amount of Gold held by the treasury. THe gold gives the dollar "buying power"> so a hundred dollar bill has more gold value to it than a 1 dollar bill. The public accepts this as the standard form of payment. When the treasury releases more gold, then the value of the dollar goes down in comparison to other countries currency.

hope this helped

Answer 4

I believe that the currencies are back by the country's economy. Since the US ecnomy isn't doing too well, he dollar is falling. The Canadian ecnomy however, is doing the same as is falling a bit but not as much as the US (due to our housing boom not being over yet) so our dollar is going up compared to your dollar. Basically, our money can buy more of your money since your money is worth less than it was and ours is worth more than it was.

Confusing, yes :) The US dollar used to be backed by the preformance of gold but now stands alone. Most countries use the US dollar as a standard (meaning that it has replaced gold) but there is a very good possibility that we could all be back by the Euro eventually

Answer 5

dollar is valueable b/c others are willing to accept it as payment for good and services. i.e. b/c you can buy stuff for it.

It is back by US economy in the sense that dollar is valuable as long as US produces goods, services and financial instruments that people want to buy.

There is no gold standard or any other material backing.

Answer 6

Because most people are gullible and will believe anything the US govt tells them.