The Euro or Dollar you hold in your hands (or see in your bank account) is backed by what?
A short history:
In 1910 the British Empire had economic and political control over a large part of the world and therefore had decisive monetary influence, basically money. The British Pound was backed by gold held in the banks’ treasuries. If you held a British Pound, you could exchange it for gold. This is called the Gold Standard, which is a monetary system in which paper money is freely convertible into a fixed amount of gold.
This was the case with the dollar until 1971, when the Bretton Woods System was ended by US President Nixon, basically ending the convertibility of dollars to gold.
When money is backed by gold, a government cannot ‘print’ money without increasing its gold reserves. Acquiring gold is hard work. It entails investing in gold mining operations.
If money is not backed by gold, then you can print money out of thin air. That is exactly what the Federal Reserve Bank and the European Central Bank have been doing. The inflation we are experiencing has its roots in that fact alone. There is a difference in how rich versus poor people experience inflation. A rich person purchasing expensive cheese or wine doesn’t care about inflation. They will continue to purchase wine even if prices go up. A poor person purchasing cheese or milk to feed their families cares immensely about inflation. They will have to switch to cheaper cheese or milk or drop them. In other words, printing money out of thin air disproportionately benefits the wealthy.
To return to the original question, the Euro or Dollar you hold is backed by what? Only one thing: the belief that the central authorities issuing them (Federal Reserve Bank in the US, European Central Bank in the EU) will act responsibly and fairly for all its people in the years and decades to come. It is all based on faith.
