Today, banks rarely keep gold or silver in their vaults. That’s because our paper money is no longer backed by gold or silver, and our coins don’t contain precious metal.
The U.S. government still holds millions of ounces of gold and silver, but citizens and foreign governments can no longer exchange their U.S. paper money for it. The government’s gold and silver are considered valuable assets rather than forms of money. Today’s coins and paper money are backed by the “full faith and credit” of the U.S. government.
If that makes you a little uneasy, try the following exercise. Put a ten-dollar bill and a blank piece of paper on a tabletop, and ask people to choose between the two. Chances are everyone will choose the ten-dollar bill. Why? After all, neither the ten-dollar bill nor the blank piece of paper is backed by gold or silver.
The difference is that people all over the United States will accept the ten-dollar bill as payment if you want to buy something. But you would have a hard time finding someone willing to accept the blank piece of paper. That’s because the ten-dollar bill is backed by the promise of the United States government, and to most people, that promise is as good as gold.
