What "backs" the money supply in the United States?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The money supply of the US is what is called "fiat money."  This is money that is simply backed by the faith that people have in the government of the United States.

The US money supply is not backed by anything like gold.  The money itself has no inherent value whatsoever.  The only reason that the US money has any value is because people think that it has value.  People feel this way because they have faith in the government of the US.  They believe that it will honor its debts and that its money will continue to have value.

Thus, the money supply of the US is backed only by the faith people have in the US government.

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mkoren | Middle School Teacher | (Level 3) Senior Educator

Posted on

Our money supply isn’t backed by anything. There was a time when we could turn paper money into the government for gold coins, but that practice ended in 1934 when Congress changed the wording of the Federal Reserve Act. The practice of turning our paper money into silver coins ended in the 1960s. Basically, our money supply is backed by a belief people have that our money is worth something.

If people lose faith in the value of our money, people will stop accepting it in exchange for goods and services. However, people believe that our money is worth something and that the government would take actions to be sure that this belief continues to exist. Fiat currency is when a country’s money supply is not backed by anything. Thus, we have what is known as fiat currency. Our money is accepted because people believe it has value.

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