Question #4c506
1 Answer
Most countries issuing their own currencies use a "fiat" currency backed by the full faith and credit of their respective governments.
Explanation:
Historically, many nations (including the U.S. and most nations with highly developed economies) have used commodity-backed currencies, based usually on gold but sometimes other precious metals. The "gold standard" bases the country's standard unit of account (for example, the U.S. Dollar) on a fixed quantity of gold.
The U.S. abandoned the gold standard during the Great Depression but maintained official linkage of the dollar to fixed amounts of gold. The Fed very occasionally would change the official dollar-gold exchange rate. In 1971, the Fed completely abandoned an official dollar-gold exchange rate.
Although some economists still advocate for a return to the gold standard, most pressure for this comes from politicians and commentators. The lack of a gold standard does not mean that monetary policy must be completely arbitrary. Our Federal Reserve generally determines the money supply by policies intended to keep inflation rates stable while adjusting to economic growth, as well.
In recent years (since the Great Recession), the Fed has followed a very "loose" monetary policy, attempting to facilitate economic recovery with low interest rates. Low interest rates enable the expansion of the money supply, and some critics of the Fed have focused on this policy to advocate for a return to the gold standard. I would simply note that inflation has remained low and stable since the Fed began its strategy of "Quantitative Easing" -- but that is no guarantee of low inflation in the future.
