A friend brought by some old silver certificate bills and asked me how he could exchange them for silver. When I explained that he couldn’t, he said the thought that money was backed by the gold and silver in Fort Knox. While it is true that at one time it was, the US government stopped backing the dollar with an actual gold supply in 1971 and all other major currencies have also stopped backing their money with gold since then (this is referred to as “leaving the gold standard”). While many people still believe that the dollar and other currencies are backed with gold, this is a myth.
This, not surprisingly, lead to the question “If there is no gold to guarantee the money, then what is it worth?” and he was a bit taken aback when I said “it’s worth the paper that it’s printed on.”
Of course, that is a bit deceiving. While a dollar may not literally have any value, the US currently has a stable monetary system in place where people are willing to trade these dollar bills for goods and services. Could this change to where people no longer are willing to do this? Yes, there is that possibility, but it doesn’t seem likely to happen in the near future.
Then again, since the entire system is currently based on a widely held belief among everyone, it isn’t guaranteed the system will last forever. As economists Milton Friedman and Anna Schwartz say in A Monetary History of the United States:
“Each accepts them (the pieces of paper – dollars) because he is confident others will. The pieces of green paper have value because everybody thinks they have value, and everybody thinks they have value because in his experience they have value.
Something to consider…