“The Big Picture / What Backs the Buck?”

The Federal Reserve Act of 1913 created a Federal Reserve System which is the central banking system of the United States. Over the nearly 100 years of its existence it has operated as the central bank, issuing currency and processing financial transactions to ensure the safety and efficiency of the payments system. As the Federal Reserve Act states, notes (coin and paper currency) are backed by the assets held at the Federal Reserve. The assets backing these claims have changed dramatically over the past 18 months, but have varied over the 97 year history of the central bank. While notes were at one point convertible into gold, the United States left the gold standard in 1971. At this point in time gold and SDRs only backed about 20% of the currency. To pay for World War II, the United States government issued bonds. Some of the issuance was bought by the Federal Reserve, thus giving truth to the saying that the dollar is backed by the full faith of the United States government. Today a mixture of assets backs the U.S. dollar. The list of special assets and programs that purchased assets over the past 18 months includes, term auction credit, CP funding facility, Maiden Lane I, II and II, term ABS loan facility, credit extended to AIG, ABCP money market funding, primary broker credit and central bank liquidity swaps.

Further Reading: The Wealth of Nations by Adam Smith with particular attention to Chapter II, “Of Money Considered as a Particular Branch of the General Stock of the Society, or the Expence of Maintaining the National Capital.”