What Is The American Dollar Backed By?

Gary A. Wilson

April 8, 2007

What is the American dollar backed by?

In the twentieth century the American dollar has gone through several phases. The first phase of the American dollar is the creation of the Federal Reserve Bank. The next phase was the worldwide strengths that the dollar gained because of the accords reached at The Bretton Woods Conference of 1944. The closing of the gold window by President Richard M. Nixon in 1971 was another important phase of the U.S. dollar. Finally, enters the current state of the U.S. dollar, the Petrodollar (dollar backed by oil sales). These are by no means the only changes that the American dollar has gone through in the twentieth century, but they are crucial to understanding where the American dollar currently stands in world finance. Even today these phases and the direct way in which they influence foreign policy and world events are relatively unknown by the American public, because of this lack of historical knowledge it is very difficult for the populace to realize that the reasons given for world events might not be valid.

The first phase of the American dollar in the twentieth century is the creation of the Federal Reserve Banking System. On December 23, 1913 the Federal Reserve Act, also known as the Glass-Owen Bill was passed through Congress. The Republican controlled Congress rushed this bill through while many of the members of the Congress were at home for the Christmas holiday. President Thomas Woodrow Wilson then signed this bill into law within one hour of being passed by Congress. The Federal Reserve System is an independent central bank comprised of twelve privately owned district banks. Although the President of the United States appoints the chairman of the Federal Reserve Bank (the Fed), and this appointment is approved by the United States Senate, the decisions of the Fed do not have to be ratified by the President, or anyone else in the Federal Government. One of the primary powers awarded to the Federal Reserve Bank is the ability to print paper money. According to The United States Constitution this power was originally reserved only to the United States Congress, “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures” (Article I Section 7). Due to this breach of the letter of the law an argument as to the constitutionality of the Federal Reserve System has been ongoing ever since its inception.

The next principal phase of the American dollar is its emergence as the premier currency throughout the world. This came about because of The Bretton Woods Conference of 1944. This conference was held in July of 1944, at Bretton Woods, New Hampshire. The conference was attended by the leading nations of the allied world with the exception of Soviet Russia. The purpose of the conference was to address the problems of foreign exchange. An agreement intended to stabilize international exchange was reached. This agreement, formally known as the Bretton Woods agreement, established international standards for official foreign exchange. By this agreement, the American dollar became the key currency for international exchange. The dollar was from then on used as a reserve to “back” the currencies of many underdeveloped countries in Africa, Asia, Europe, and Latin America. These underdeveloped countries were anxious for American capital in order to expand their industrial development, while capitalists in the industrially developed areas of the world were seeking the stability of an international monetary standard.

Another accomplishment of the Bretton Woods conference was the Creation of The International Monetary Fund, and the International Bank For Reconstruction and Development also known as the World Bank. These institutions were set in place as supportive measures to ensure international monetary stability. An interesting note about the misleading name of The World Bank is that it is the President of the United States of America always appoints the head of The World Bank.

The Honorable Ron Paul of Texas did a good job of summing up the outcomes of the Bretton Woods Conference in a speech he gave before the U.S. House of Representatives on February 15, 2006.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent

world reserve Currency, replacing the British pound. Due to our political

and military muscle, and because we had a huge amount of physical gold,

the world readily accepted our dollar (defined as 1/35th of an ounce gold)

as the world’s reserve currency. The dollar was said to be “as good as

gold,” and convertible to all foreign central banks at that rate.(2)

Ron Paul went on to state that the whole monetary standard was doomed to fail. According to Paul the United States did exactly what many of the detractors of The Bretton Woods agreement said the U.S. would do: that was to print far more dollars than there was gold backing for. Even though this was obviously the case, the world was perfectly content to accept those dollars for more than twenty five years with little question. As long as no country actually asked the U.S. to honor their stores of dollars for their worth in gold, the system would continue indefinitely (2).

The next major change to the U.S. dollar came a quarter of a century after the Bretton Woods Agreement. This change happened when the American dollar was no longer backed by the gold standard. This officially took place on August 15, 1971 when President Richard M. Nixon in a televised address to the nation stated that America would no longer honor the dollar as being redeemable at 1/35th of an ounce of gold. This proclamation has been termed as “the closing of the gold window.” A series of events led the U.S. to this point.

In the 1950’s and through the 1960’s the Western European nations experienced a balance of payment surpluses, while the United States balance of payments ran an average deficit of $1.5 billion per year. This deficit situation for the United States was not necessarily alarming due to the large amounts of dollars involved in foreign exchange. By the mid 1960’s Western Europe was well on it’s way to getting back on their feet economically and began to become large scale exporters. Pressures upon the United States dollar accelerated as France’s President de Gaulle and other Western European central