If many people know that the US dollar is not backed by any gold, why do they still continue to believe in it?

Question

I think most people know that the only thing backing the dollar is basically nothing other than the paper it's on. Is there some kind of belief system in place that keeps people from "making a run at the bank" and cashing out? What keeps the dollar valuable, mind control, perhaps?

Answer 1

the times when this country saw it's citizens' standard of living was when we went onto a gold standard. the periods of when you see the standard of living decline is when they went off of it.

call it a coincidence. the gap between the upper class and the lower class is vanishing. the middle class will soon be phased out.

the Fed cannot buoy the economy forever by just printing more money. sooner or later the chickens are going to come home to roost. and when they do, it's gonna get ugly.

get ready for the NAU and the new currency, the Amero. Americans won't have a choice. you can thank the Bankers for the mess we are in.

Answer 2

Nothing so sinister. Simply, those who use the dollar trust in it. The receiver (wage-earner or business owner) knows that the same dollar can be used for purchases, and so they accept the dollar in exchange for goods or services provided.

The dollar (and every other major currency currently circulating world-wide) is fiat money - money that has value because governments, businesses and consumers are willing to use it. I think all governments (U.S. included) keep some gold in reserves, alongside foreign exchange, treasury securities, and other near-liquid assets, but a fully-convertible currency has not been in circulation since the early 1970s.

People don't make a run on the bank because their dollar-denominated assets lose less value sitting in the bank than they do in the form of cash. Yes, inflation does chip away at the purchasing power of every currency, but interest-bearing deposits mitigate that decrease. You suggest that people should withdraw their dollar-denominated assets and purchase gold, and yet that gold cannot be used for making purchases; ingots are not accepted at the grocer, auto repair shop, or highway tollbooth. Moreover, because there is a limited market for gold, there is a transaction cost for converting gold into currency and vice versa. Thus, it is difficult to realize gains in the value of gold relative to a fiat currency without sacrificing liquidity or possibly even losing value in the transaction.

Note that the dollar is backed by the full faith and credit of the U.S. government, meaning that it is the accepted means of settling debts, public and private, for so long as the U.S. government remains in existence. If you doubt that the U.S. will remain for very long, it makes sense to purchase gold or some other reposit of wealth; note, though, that there's nothing guaranteeing that gold will hold value through some future calamity. In fact, where a market system does not exist to recognize gold as a common means of storing wealth and facilitating exchange, the utility of gold diminishes so that the only "currency" would be commodity items. Effectively, then, in the absence of such a market, there would only be barter.

So, no mind control, just trust.

Answer 3

Since most financial transactions do not involve any currency (total of 800 Billion dollars) but take place with electronic transfers (500 Trillion dollars a year), the dollar mostly serves as unit of measure. The only thing that matters is that the unit's or dollar's purchasing power remains relatively constant There is no reason to think that backing the dollar with gold would achieve this better than the Federal Reserve, and in fact using gold for money would require that new gold be mined at a rate that matched the rate of economic growth to keep purchasing power nearly constant.

If people want to hold gold as a store of value, they are free to do so, as they are free to hold any other commodity, but most people prefer to hold dollars or dollar denominate interest barring bonds because they want to minimize the risk to their future purchasing power.

Answer 4

There's nothing to be gained by money being "backed" by anything. Money is just a medium of exchange for things that have some real value. Prices can vary as people's perceptions of relative value change. If it takes more dollars to buy a single Euro, then the prices of European goods seem higher to people who have dollars and they are less likely to buy those goods. On the other hand, in that condition, the prices of U.S. goods appear to be a good deal for those holding Euros and there is some motivation to buy those U.S. goods. So what might seem to some to be a "weakness" in the dollar can help those people who want to sell their goods overseas. Yes, the price of oil wil then go up some more, but maybe we in the U.S. can learn to reduce our reckless consumption of energy, and that wouldn't be a bad thing, would it?

In terms of "making a run at the bank," that only occurs if the depositors panic about the possibility that that bank will somehow fail and their money might somehow disappear. So if those depositors happen to be overseas they would be dumb to try to get at dollars that have lost more of their value - what do they do with those lower-value dollars they pulled out impulsively. And, for that matter, what harm would that do to Americans?

Dollars have a value only dependent on what they can buy, not how many of them it might take to buy an ounce of gold. The U.S. went off the "gold standard" back before World War II and it was one of the smartest things our Government has ever done. People in other countries invest (which is not the same as depositing money) in American financial matters because we are, by far, the best economy in the World.

Answer 5

Believe that a gold standard exists or believe in money at all? Your question is poorly worded.

The answer to the first is that "many people" have not read a newspaper since the 1970s at least, before the gold standard was dropped.

'nuff said.

The answer to the second is that there is far more value in any economy then cash in circulation. Yes, it is trust that others share the abstract recognition of money in order to assign shared values between like and unlike services and objects.

I think there have been relatively recent cases where faith was lost in the monetary system of a country. Argentina comes to mind, but I could be wrong. Others might be able to give you better examples.

There is nothing "mind control" involved - if people want to trade, then they can barter things they actually have, or they can have an abstract money system where cash is not actually needed, and value can be created.

Since we are not cavemen anymore, we choose the latter.

What other alternatives would you recommend?

Answer 6

b/c others believe in it, which means they will accept it when you want to buy stuff from them.

You can view domestic inflation and international exchange rate as measure of how strong this belief is.

There is obviously no "mind control", so the belief is pretty fragile. If sufficient number of people stop believing in a currency, it collapses. There have been plenty of examples in third-world countries.

If you think that's "irrational", look at fashion or pop music or teen "styles". Stuff is cool b/c others think it's cool. Next year the fad will change and some other stuff will get cool.

Answer 7

Not mind control at all -- It's backed by the full faith and credit of the U.S. Treasury who have never defaulted. Not many institutions command that respect. It's not easy to earn that kind of reputation.

Answer 8

after the gold standard we went to paper currency because debts can be settled by documents, which is a lot more convient to carry around then gold. the government really does nothing but collect taxes and print money, when you really think about.

Answer 9

Most countries are going this way. Gross National Product is a better way to calculate the value and is more fair. Hording gold doesn't neccasarily make a good currency.

Answer 10

The US dollar is backed by the US government.

That commitment is better than gold.