US Dollar is a fiat money; fiat money is currency used due
to government’s order. There is no intrinsic value of such money, whereas in
gold standard the currency did have an intrinsic value—usually some amount of
gold. However, we still use such fiat money because of the ‘credit’ of the
government issuing such money.
United States began abandoning gold standard from 1933 by
President Franklin D. Roosevelt, and by early 1970, U.S. completely severed the
relationship between US Dollar and gold. There are 3 major different ways to
determine the value of Dollar: exchange rate, Treasury notes, and foreign
exchange reserves.
1.
Exchange Rate: This way measures the value of
Dollar in comparison to other countries’ currencies. If other countries are
willing pay more of their currencies for US dollar, the value of US Dollar goes
up; whereas, if they are willing to pay less, the value of US Dollar goes down.
2.
Treasury Notes: This way measures the value of
Dollar with the faith of investors in US’ economy. Investors buy Treasury Notes
from the government, and receive fixed about of interest until certain periods.
Generally, if there is less faith toward US economy, there is less demand of US
Dollar; otherwise, vice versa.
3.
Foreign Exchange Reserves: Many foreign
countries hold/save US dollars for their economic interest, and this method
evaluates value of Dollar based on tendency the amount of savings of US dollar
among foreign countries.
Reference: for more info click here.
This post has got to be one of your best in regard to use of statistical data of how monetary policy works between nations. I particularly like the commentary of the dollar simply being legitimate by fiat, which is so true post-gold standard. As an English major and a student of language, I find it interesting how the referent of a symbol, such as the dollar, has evolvled into something else. I know this may sound a bit strange, but faith in the dollar is very simular to spiritual faith. Without faith in its value the referent changes, thus altering the meaning of the object...in this case, the dollar which is siimply a promissary note. Good fleshed out details.
ReplyDeleteYes, fiat money is definitely strange one; non-materialistic things such as faith or ethos can create materialistic value, which is the concept troubles me sometimes.
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