Q:

What backs the money supply in the United States?

A:

Quick Answer

The money supply in the United States is backed by the "full faith and credit of the United States." It is not backed by any physical asset.

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Full Answer

The United States employs a system of fiat money in which the value of money is determined by law and the willingness of buyers and sellers to accept it as a medium of exchange and a store of value. The money supply was once backed by gold, but in 1971, President Richard M. Nixon removed the U.S. economy from the gold standard. The Federal Reserve Bank controls the money supply by adding or removing money from circulation. Increasing the money supply is known as expansionary monetary policy; decreasing the money supply is known as contractionary monetary policy. Expansionary policy is typically used to increase economic activity, while contractionary policy is used to manage inflation.

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