The US dollar is not backed by gold any longer since FDR outlawed that in the early ’30’s. All those old gold backed notes had to be turned in for the new ones. William Jennings Bryan would have finally been so pleased. You recall his famous speech about not punishing the American public on this “cross of gold”. It was thought by he and his populists supportors that any financial system or markert system was more or less criminal because it was used to trick and cheat the average Joe. That is a paraphrase of course but I believe it pretty accurate. I invite you to do your own reading and disagree if you like.
The US dollar is backed not by gold or anything else of a tangible nature but by the “full faith and credit” of the US. Exactly what the hell does that mean? It is a fair and necessary question. After all when you pay for something with a dollar you want to be sure that the merchant or seller is willing to accept it for the good or service you want. Now put on your thinking cap and don’t shy away from where the logic takes you in the examination. At heart what that phrase means is that we are a big dog. We have lots of what not only we want here within the confines of our border but also that many people around the world want what we have to offer. Microsoft sells primarily services; we used to sell lots of steel, autos and other manufactured goods that everyone wanted. We don’t sell much of those overseas any more but we do still have an export business think goodness. We continue to sell manufactured machines, agricultural products, airplanes, services (oil and gas development and production skill for example) and hi tech equipment. It is a shame we don’t also sell TV, radios, Ipods and all those other products we formerly made right here. Our textile, shoe , auto, furniture, and applicance industries are shells of their former selves.
We also have had stability in our economy, banking and governmental systems for most of the last century. Those are huge advantages for us. But at the heart and soul of the backing for the dollar is a combination of several factors. First is miliatry might. You might not like to think of this one but it is a fact. Every country can make demands, invoke sanctions against other nations, put tariffs on imports or exports or appeal to the United Nations but in the end if there is no muscle behind the rhetoric the world won’t pay much attention to you. We have the power to enforce our will on others when push comes to shove. Study your history and you will see that the US did not emerge as a true international power and player on the world stage until WWI and that was because we shipped a few million men to Europe along with the material to help defeat Germany. Until then we were a important but nevertheless second rate power. England was the big dog and had been for a century after its defeat of Napolean.
Second, we have so many things the world still wants–even our real estate. Surely you have noticed the foreigners buying American buildings and land for development. This has been an accelerating trend for about 3 decades now. We are the epicenter of marketing and merchandising. The global markets love getting into the American market. The Chinese love us. Their sales to us are making them rich and building their nation. You think the Chinese economy would grow the way it has without those billions in sales each year to the US? They may not like us, but they love our consumers. For those foreigners to do business here or to buy goods or services here they have to pay in dollars–hence value for the dollar.
Lastly, I submit it is the moral authority of the US and respect for our beliefs–yes, those corny beliefs set out in the Delcaration of Indendence and the
Constitution. In the long haul that is what counts the most. Even if we make mistakes on occasions we usually right the ship after a while. We survived the moral ignominy of being allies with Stalin after all. We were truely in bed with the devil there. We fought a war of ideas with the Communists for decades and held our own militarily and ultimately prevailed by having the better ideas for human advancement and hope.
So, the value of the dollar is an abstraction. You can line up all the Phd. economists you want and let them lecture about bell curves, GDP, supply side or demand economics but those things don’t really define what the dollar is worth. The value of the dollar is like one’s reputation it can move up or down depending on how others perceive you. The value of the dollar is based on ideals, principles, might and tenets of behavoir as a nation that will win the approbation of its own citizens and those around the world. We, Americans, are the value of the dollar. If we will be worthy of our heritage then the dollar will remain strong.
You can have your own ideas about this and no doubt some of you will have thoughts superior to mine. I enjoy thoughtful reflection about fundamental questions of our time. The value of the dollar is very fundamental. If its value diminshes so does ours and our lifestyles.
The pound sterling was 20 shillings and was made of silver. Just like the sterling silver set on your hutch. At the time silver was valued more than gold. A guinea was 21 shillings. A quid was a pound but of gold.