What Really Backs the U.S. Dollar?

Includes: DIA, GLD, QQQ, SPY, UDN, UUP
by: Doug Eberhardt

Since 1971, U.S. citizens have been able to utilize Federal Reserve notes as the only form of money, and for the first time had no currency with any gold or silver backing.

This is where you get the saying that U.S. dollars are backed by the “full faith and credit” of the U.S. government. In other words, Nixon implied "take our paper dollars or don’t".

The U.S. at this time was a world super power having been victorious in WWII and there really wasn’t much anyone could do about the decision by the U.S. government to abandon metal backing.

What does a dollar or Federal Reserve note represent now that gold and silver no longer back any of the currency printed in the U.S.?

A dollar bill used to say,

This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury or at any Federal Reserve Bank.

Look at a dollar bill today. It simply says:

This note is legal tender for all debts, public and private.

In other words, you can’t redeem it for “lawful money.

Guess what folks? A dollar bill is not lawful money, but rather “legal tender.”

From the Treasury;

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. Redeemable notes into gold ended in 1933 and silver in 1968. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are “backed” by all the goods and services in the economy.

What the government, via the Treasury and the Federal Reserve, really did in 1971 was coerce you to accept something (Federal Reserve notes) that used to be redeemable for gold and/or silver but now aren’t redeemable at all.

But let’s play along with their definitions and see if “all the goods and services in the economy” really back the dollar?

What the Treasury would have you believe is that GDP backs the dollar. GDP is defined as “The monetary value of all finished goods and services within a country’s borders in a specific time period It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.”

To break it down;

GDP = C + I + NX + G


  • “C” is equal to all private consumption, or consumer spending, in a nation’s economy.
  • “I” is the sum of all the country’s businesses spending on capital.
  • “NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports - Imports).
  • “G” is the sum of government spending.

For the U.S. presently:

  • C is down to nothing with high unemployment and people struggling just to pay bills.
  • I is down to nothing (especially now that lending has dried up).
  • NX is hugely negative and has been for quite some time.
  • G is all that is running the show.

Yes, that’s right, government spending is all that is running the show for the most part. Does anyone think that adding more debt to debt is in the long run a healthy thing to do? Does it work for the consumer to take out more credit cards and use this newly created credit to pay for old debt and current expenses? Hardly.

So how will it work for the U.S. government? Can the U.S. government really afford to keep policing the world and fight wars when the only thing that allows them to do so, the U.S. dollar, is on the brink of collapse?

So if this theory of GDP backing the dollar is viable, and if government spending is all that is backing the dollar at this point in time, where do they get the money to do it?

Answer: taxes and printing it out of thin air.

Since politicians don’t get elected by raising taxes, that leaves only one viable answer; printing it or creating credit. Or in other words, DEBT. It’s a nice legacy that our generation is leaving future generations isn’t it?

The George W. Bush administration was spending out of control and President Obama’s administration is piling on debt at an even more alarming rate “to prevent the system from collapsing” mind you. Any bets on their success? The system will collapse as long as government keeps spending.

But the reality with this government theory of GDP backing the dollar is flawed to begin with. The dollar acts as a “medium of exchange” and is only valuable because it can be exchanged for goods and services. It is one’s production that is the actual backing of the dollar, not the piece of paper itself.

Take another look at that dollar bill you pulled out….

Do you need further proof that U.S. dollars are debt? What does it say at the very top of the dollar bill? It’ says “Federal Reserve Note.”

What is the definition of the word “note?”

Note: “A written promise to pay a debt.”

What is this debt that you, the one who is possessing these dollars, has to pay? I thought your production (via your hard earned labor) was something you got to keep? But according to what you are being paid for your labor, i.e. dollars you are accepting as payment, are nothing but IOUs.

Since you can’t redeem these IOUs for “lawful” money (gold or silver) any longer, what makes you think that these pieces of paper called “notes” that have 38 short years of existence, are going to maintain your wealth in the years to come?

What are you doing about it today to protect yourself?

Don’t be confused by all the games the Treasury and the Federal Reserve are playing. Educate yourself as to what money is and what really backs the U.S. dollar. Educate yourself about investing in gold.

Disclosure: no paper positions