Question

            What is the argument for “backing” money?

            What is the argument for not “backing” money?

            Is the US currency backed? If so, with what. If not, why not.

Answer 1

1. Currency backing is the act of backing liquid currency by precious metals like gold or silver . There would be a direct degree of correspondence with the value of the liquid currency .But most of the economies these days are using Fiat currencies, which are the currencies not backed by any valuables. Many other countries including united states have used Gold standard in the beginning of 20 th century. But later on most of the world nations have shifted to Fiat money. The value of Fiat money is backed by the government which issues it. Us Dollar , Euro , pound and many other currencies these days are Fiat money . But still there are arguments which supporting currency backing. A) The total money value of the currency circulated in the country are backed by fixed assets; that itself would be a stabilising mechanism. B) It was expected to reduce inflation and budget deficits ,since government can't print excess currency without a surplus of accumulated gold. C) It is advantageous for exporting nations. As they export more, they will gain more gold. Due to several limitations, Us govt had abandoned it in 1971 . 2) Limitations of Currency backing. Attempts by the Us federal reserves to protect gold reserved had intensified crisis. People demanded more gold and it had led to a fall in over all consumption expenditure. B) Unlike commodity based currencies Fiat money never carries any intrinsic value and it is non redeemable . C ) Fiat money carries fixed value D) It is supported by the faith of the holder and a government declaration; acts as a storage of purchasing power . 3) Currently Us currency is not backed , its an example of Fiat currency . Value of Fiat money is backed by the government which issues it . Like wise it is the Us government which manages dollar .