China and gold

The Cobden Centre ^ | 10/21/13 | Alasdair Macleod

[BfloGuy]

As of January 2013 The Federal Reserve had deposits of 8.133 thousand tons of physical gold. This is about the equivalent of Germany Italy and France, the next three largest holders of gold, put together. China had about 1000 tons.

Ah, but is that 8,133 tons really there? And how many of those tons are deposits being held for foreign entities? That's not meant as a trick question; I'd just like to know.

[BfloGuy]

The dollar is backed by oil.

The dollar is backed by nothing. Unless and until you can march into your bank and exchange dollars for a predefined quantity of oil, it is not backed by oil.

What you are saying [I think] is that increased oil drilling in the U.S. will help keep its value high on foreign-exchange markets. Likely true, but it is a mistake to call that backing and it does nothing to prevent the Fed from further cheapening those dollars by creating more of them.

Up until 1933, the dollar truly was backed by gold at a defined weight set by Congress as is the Constitutional requirement. Any holder of dollars could exchange them at the teller's window for their equivalent in gold.

If confidence in the dollar was low, more people would exchange them for gold, drawing down the gold reserves and forcing the banks to tighten credit thus relieving inflationary pressure.

That is the only definition of backing a currency.