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Does gold back the American dollar?


Not any more it doesn’t. It used to. Today the American Dollar is backed by the "full faith and credit of the United States." At least, that’s what it says on the bank notes.


Here’s what happened.


After the Second World War, a system similar to the Gold Standard was established by the Bretton Woods Agreement. Under this system, many countries fixed their exchange rates relative to the US dollar. The US promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold.


This is why, for several decades, the US dollar was an accepted currency in almost every country in the world. It was pegged to the price of gold, which was fixed at $35.


The dollar had value everywhere because it could be exchanged for its value in gold. At least, if you were a foreigner you could exchange your dollars for gold. (US citizens were not allowed to own gold between 1933 and 1974.)


For a while the Bretton Woods Agreement achieved its purpose, which was to maintain stability among the world’s currencies in the years after the end of the war.


But there were some imbalances in the system which led to its downfall.

President Richard Nixon eliminated the fixed gold price in 1971. And since then gold has been a commodity and subject to the laws of supply and demand. Which is why it now costs significantly more than $35 an ounce.


So gold no longer backs the American dollar.


However, gold isn’t just a commodity like others. It is still perceived as being a reliable store of value and wealth, which is why nations still hold some of their reserves in the form of gold.




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