Friday, September 14, 2018

What Is That Dollar?

If I've heard it once I've heard it a thousand times, someone whines that the federal government spends by printing worthless paper money. Of course, they refer to the fact that the US dollar is not backed by anything, and by "anything" they mean it is not backed by gold. I say "So what?" Do people really think that if it were backed by gold, and that if the currency failed they would be reimbursed with gold? Hah! On the extremely remote possibility that the US dollar were to fail we would all have bigger problems than just getting our money reimbursed. Does a lack of intrinsic value make the dollar worthless? I think not. Is the paper deed to your house worthless? How about that paper title to your car? As for intrinsic value, the federal government doesn't actually spend paper dollars. It creates electronic dollars which have even less intrinsic value than paper dollars.

So what, exactly, is the US dollar and why does it not need gold backing? The US dollar is a promise to us from the US government that it will accept that US dollar in payment of federal tax. The US dollar is basically a tax credit that the federal government swaps us in return for the goods and services it buys. We, in turn, seek those dollars in lieu of other currencies because no other currency will be accepted in payment of federal taxes. That tax credit gives the dollar value and that value makes it a negotiable instrument that the public finds useful as a medium of exchange, a unit of value, and a store of value or, in other words, money. Those same people who whine about paper dollars having no intrinsic value apparently are simply fooling themselves because whenever I ask them to send me all of their "worthless dollars" they shut up.

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