Understanding the Backing of the U.S. Dollar: History & Current System

A detail of the U.S. one-dollar bill.

To improve the public's confidence in the U.S. dollar and encourage its use in financial transactions, the Federal Reserve used to hold a specific amount of gold for every dollar it placed into circulation. This meant that you could, at least in theory, redeem your dollars for gold. Even when the general public did not use this redemption right, the gold reserves stabilized the value of the dollar and provided the public with the much needed faith in paper money. These days, however, U.S. currency is mostly backed by the word of the U.S. government.

Present Policy

Believing that the public had developed sufficient belief in paper money, Congress amended the Federal Reserve Act on January 30, 1934. Since then, the Federal Reserve can hold U.S. Treasury and Federal Agency bonds as reserves, instead of gold. These bonds are simply printed paper, resulting in no true valuables backing the U.S. currency in today's financial system. While the Federal Reserve, like most central banks on Earth, holds some gold, its quantity is far below the total value of dollars in circulation.