The US dollar isn’t backed by nothing. Consider the Amazon giftcard.
A piece of plastic. A digital abstraction on a database. Printed at will by Bezos. Its only value is that it’s legal tender for Amazon’s vast resources: a concrete claim against their productive capacity. You can walk up to this $2 trillion machine and commandeer its output with a little piece of plastic. That abstraction becomes very real when it’s tied to acquiring real things.
Soft and Hard Backing
A soft currency is one backed by no hard asset and with no fixed-exchange rate. Conversely, a hard currency is one backed by something concrete at a fixed-exchange rate. Historically, gold has been that backing.
However hard or soft, that has nothing to do with why the currency is fundamentally valuable. Gold backing is a constraint on issuance; a way to mitigate abuse/printing/inflation of the currency. It’s not what imbues its value.
A currency is valuable for the same reason that Amazon giftcard is: it represents a claim on the issuer’s resources.
Giftcards are backed by nothing the same way the dollar is. No fixed exchange rate to a precious metal. How come goldbugs and bitcoiners don’t speak disparagingly about these flimsy little pieces of plastic? Probably because it’s less politicized.
Go on Amazon and look at all the nothing backing those giftcards. If Amazon went bankrupt or had nothing to sell, those giftcards would be worthless. We know they’re serious because there’s plenty serious at Amazon.
The claim on resources imparts the value.
The fixed-exchange rate is an Austrian distraction. No one actually wants the gold; they want access to the issuer's resources.
Gold convertibility serves as enforced discipline for issuance. Gold has no intrinsic utility or value, discussed further here: Crypto, Stocks, Hammers, Gold, & The Meaning of Intrinsic Value. It’s literally nothing more than a shiny rock, BUT, it’s a shiny rock a government can’t print. That’s why they like it. It’s not any more sophisticated than this.
When you fix a currency’s exchange rate, you're placing an artificial constraint on its issuance by tying it to something else you don’t control. This is done out of distrust that governments won't inflate it. I commiserate with this. But that's the only reason to desire a "hard" currency: it limits the issuer.
You can call a non-fixed currency “soft”, but I see plenty of hardness there.
A currency has worth the same way Amazon giftcards do: you redeem them on the resources of the issuing nation. Real, hard assets are buttressing those pieces of paper and plastic.
This applies to any giftcard, but Amazon is a strong exemplar because its business is so massive and diverse. If giftcards had a secondary market, Amazon's would carry far better trade value and "moneyness" than JC Penney's or McDonald's, for the same reason the dollar carries more moneyness than the Zambian kwacha.
The US Dollar is Backed by Nothing….
$1M USD can be swapped for $1M of any US assets you please. A $29 trillion monstrosity of nothingness at your service with those fiat pieces of paper in hand. A country with nothing worth consuming has a currency that reflects it.
Whose resources are in highest demand? What entity is the strongest, most productive, and least likely to go under? The US dollar is the giftcard of the US economy. Respect the giftcard.
A necessary but not sufficient condition for a currency to have value is for the issuing nation to collect taxes in it.
Fiat currencies are extraordinarily valuable. They're the only assets in the world backed by the supreme authority through which all other authority flows: violence. A man with a gun telling you what to do is the most "not a social construct" thing in human history.
They're the only assets in the world with mandatory bids: taxes. You must accumulate them, because if you don't, you cannot tithe. And then the entity providing the protection services that allow society to exist sticks you in a box.
When the state demands taxes in their currency, that means domestic businesses need it; it’s a forced bid. They sell their goods in the currency, thus creating demand for it. You have a claim on the output of all US output because the US government literally forces businesses to seek USD for goods and services via taxation.
This is a form of violent coercion. The US is the most powerful violence apparatus in history.
Behold all the “nothing”…
What makes a currency carry notable value is when taxes are collected in it, AND it represents a claim on resources in an economy with a lot of things worth claiming.
Functionally Understanding the Dollar
Dollars are defined as a liability of the Federal Reserve. I don't find this framing useful or accurate. It's an accounting technicality, an answer that gets you an A on a test but has no functional bearing on why dollars are worth anything and manipulates the word “liability”.
What does the Fed owe you, exactly, for your $100? There's no expiration, no interest payment, no claim you can exercise, and no principal to repay. If none of this exists, it isn't a liability. The Fed owes you absolutely nothing in exchange for your dollars.
People say this because they think the Fed creates the money supply. It doesn’t.
97% of the money supply is created and allocated by bank loan officers for the benefit of the bank. Banks create the money supply. The remaining ~3% is the Fed/cash. This is further elaborated in here, and in my Fed series broadly.
USD is a liability of the US economy. Not the Fed.
Equity: A Bad Comparison
Are dollars more accurately conceptualized as equity? I also think this is misguided, because equity is a claim on resources only in theory.
When I say “claim on resources”, I don’t mean it in a flowery academic way like we do for stocks. Stock is also described as a “claim” on company profits and assets; I encourage you to test that out, see how it works in practice. The giftcard needs no theory to show its merit. The stock however…
Go try to redeem your AMZN stock for Amazon’s resources. Email their investor relations department and say “one cashflow please”, see what they say. It’s an academic construct, stocks do not exert claims on cashflows or resources in any real-life way. The history and details of this are broken down further here:
Walk into Nvidia with your NVDA shares and tell them you want .00004% of their GPUs in exchange for your stock. See what happens. If they decide to give you dividends (they don't have to), it's typically because growth is slowing and they don't know what else to do with the money. There is no real claim on anything with stock, except sometimes in bankruptcy, and even then, only sometimes.
Those who analogize currencies to country equity do so in a superficial way. It makes sense on paper, but it’s not how it works in practice.
Closing
People say "fiat currency" as if it's a guy in a wizard outfit decreeing his potions are legal tender. It's a bit more serious than that. The resources of the issuer provide the value. The coercive imposition of taxation means you must accumulate that currency to access those resources. None of this is an abstraction.
The gold standard is gone. Fixed-exchange-rate economics is a red herring for understanding modern currencies. Update the models.
You can continue updating them here:
Wartime Fiscal Policy
While the wisdom of “living beyond your means for too long eventually comes home to roost” is very much true, remarks regarding “bankruptcy” “insolvency”, and the like are wrong as they pertain to the United States government. Technically wrong. Instrumentally wrong. Insolvency is a balance‑sheet concept. A financial sovereign writes the balance sheet.
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