What Is the US Dollar Backed By? Nothing But Your Faith

What Is the US Dollar Backed By? The Illusion of Value

Among those whom I like or admire, I can find no common denominator, but among those whom I love, I can: all of them make me laugh.H. Auden 1907-1973, Anglo-American Poet.

Update August 25, 2024

The Illusion of Security: Unraveling the True Value of the US Dollar

Many people mistakenly believe that the US dollar is backed by gold, a notion steeped in outdated perceptions. In reality, the US dollar is supported solely by the full faith and credit of the US government. This means its value hinges on the government’s honouring debts and sustaining economic stability. While this may provide a sense of security, it is essential to recognize that the dollar’s worth is ultimately intangible—a product of collective belief rather than physical assets.

While the debate over the dollar’s actual value and stability will likely continue, one thing is certain—the US government’s management of the economy will continue to play a crucial role in determining the dollar’s strength and its impact on global markets.

So, whether you’re a gold bug or a dollar bull, it’s essential to stay informed and understand the underlying factors that influence the value of the US currency.

What is the US dollar backed by? Contrarian version

The US dollar is backed by nothing other than empty promises but the masses are not ready for Gold standard and here’s why.

The US dollar, my dear sir or madam, is not backed by anything tangible, only by mere government promises. The notion that all paper money will cease to exist and everyone will revert to the gold standard is nothing but a pipe dream, and those who believe it are inaccurate. One must not forget to consider mass psychology, for it is the driving force behind any movement, be it social or economic.

History has proven that the gold standard has flaws. Thievery and deceit were still prevalent, with bankers shaving gold coins and engaging in other questionable activities. Gold bugs may ask, “What is the US dollar backed by?” and they may answer, “Nothing.” While this might be true, it is irrelevant for the masses to think otherwise.

It is not prudent to reject the value of the US dollar, for it is still widely accepted and trusted by the majority. The day may come when the masses lose faith in the US dollar, but it is not anytime soon. So, for now, let us be patient and not succumb to the false allure of the gold standard, for it is not the answer to all our monetary woes.

How Fiat came to be

In early 1933, to fight severe deflation, Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin. These acts included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, the 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act.[12] These actions were upheld by the U.S. Supreme Court in the “Gold Clause Cases” in 1935.[14]

For foreign exchange purposes, the set $20.67 per ounce[citation needed] value of the dollar was lifted,[when?] allowing the dollar to float freely in foreign exchange markets with no set weight in gold.[citation needed] This was terminated after one year. Roosevelt attempted first to restabilize falling prices with the Agricultural Adjustment Act; however, this did not prove popular. Instead, the next politically popular option was to devalue the dollar on foreign exchange markets. Under the Gold Reserve Act, the price of gold was fixed at $35 per ounce, making the dollar more attractive for foreign buyers[citation needed] (and making foreign currencies more expensive for those holding dollars). This change led to more conversion of gold into dollars, allowing the U.S. to corner the world gold market effectively.

The suspension of the gold standard was considered temporary by many in markets and in the government at the time, but restoring the standard was considered a low priority to dealing with other issues. Wikipedia

The Psychological Grip of Fiat Currency

Behavioural psychology plays a crucial role in understanding why people trust fiat currency. Humans are inherently driven by herd behaviour—a concept explored as far back as 2000 BC by ancient traders who observed collective madness during market frenzies. This same principle applies today, as the masses trust the US dollar not because of its intrinsic value but because everyone else does. This collective belief, however, can be both a strength and a vulnerability.

The concept of mass psychology in financial markets is not new. In the 1600s, philosopher Baruch Spinoza explored how emotions could overpower rational thought, leading to irrational market behaviour. Similarly, in the 20th century, behavioural economists like Daniel Kahneman and Amos Tversky introduced the idea of cognitive biases—systematic errors in judgment that affect financial decisions. These biases, such as the bandwagon effect, explain why people continue to place their faith in fiat currency, even when its underlying value is questionable.

The Temptation of Gold: A Misguided Obsession

Gold bugs, those who advocate for a return to the gold standard, argue that fiat currency is inherently worthless and dangerous. They view the US dollar as a symbol of government overreach and inflationary policies, which erode the value of savings and hard-earned wealth. On the other hand, gold has been a store of value for centuries, weathering economic turmoil and maintaining its significance across generations.

However, history reveals the flaws in a gold-based system. As early as 500 BC, Greek historian Herodotus documented how unscrupulous traders shave gold coins to create counterfeit currency. This practice continued through the ages, undermining the integrity of gold as a stable store of wealth. Even in modern times, the allure of gold is more psychological than practical. The famous economist John Maynard Keynes famously dismissed the gold standard as a “barbarous relic,” arguing that it stifles economic growth and limits monetary policy flexibility.

The Inconvenience of Gold in Modern Economics

Carrying heavy sacks of gold or silver coins is impractical in today’s digital age. While some gold enthusiasts argue for a return to the gold standard, they overlook the realities of modern economics and the convenience of digital transactions. Moreover, they ignore the psychological factors that drive human behaviour, such as the desire for instant gratification and the comfort of perceived stability provided by fiat currency.

Instead of reverting to an outdated system, we should focus on enacting new rules to address the flaws in our current economic model. One crucial reform is to prevent banks from creating money they do not have—a practice known as fractional reserve banking. Limiting this practice can curb inflation and reduce the frequency of boom and bust cycles. Additionally, governments should be restricted from creating debt without having the funds to support it, ensuring that new projects are only undertaken when financially viable.

Conclusion: A Cautionary Tale for the Future

The tale of the US dollar and the gold standard is not just an economics story but a lesson in human behavior. From the ancient traders of 2000 BC to modern economists like Keynes, the threads of greed, trust, and collective madness weave through the history of money. As we navigate the complexities of the global economy, it is crucial to remain aware of these psychological forces and the lessons of the past.

In the end, whether we believe in gold or the US dollar, society’s collective belief determines the value of money. As the Chinese proverb wisely advises, “One never needs their humour as much as when they argue with a fool.” Let us not be fooled by the allure of the past, but instead, focus on creating a more stable and equitable future.

One never needs their humour as much as when they argue with a fool.

Chinese Proverb Sayings of Chinese Origin