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Comment by zhdc1 | Hacker News Reader

I don't understand this argument. US dollars are legal currency, so all you have to do to redeem the underlying value is purchase something with it (or, if you want to be pedantic, use them to cover a public or private debt).

Of course, the underlying value of what you can get in exchange for them can change, but that's true for every medium of exchange in the first place. There's nothing magical about gold, silver, or any other commodity, nor is there anything special about tying a piece of paper to a commodity. If the government doesn't want you to use it or any derivative products as a currency, like what happened in the US with the 1933 Coinage Act, you're pretty much out of luck.

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Legal currency simply means that a payment in that currency is considered, by courts of law, to extinguish a debt. (So a creditor can't demand to be paid in diamonds, for example. As long as the debtor pays in legal currency, the debt is considered extinguished.) On the other hand, a redeemable currency is a currency which the issuer promises to redeem for a certain amount of some commodity. This is independent from the fact that such a currency might (or might not) be accepted as payment in private transactions. The US dollar is legal currency, but is not redeemable.

My argument is that the same organization is the one specifying whether a particular piece of paper or commodity can or cannot be used, and under what conditions. As we've seen in the United States, currency is only legal tender because the US government says that it is - there is nothing intrinsic about either fiat, representative, or commodity-based currency as a legitimate means of exchange. All of these classifications can be changed at any time (Emergency Banking Act of 1933).

Why, again, should I care about whether or not my dollar can be converted into silver if the government can, overnight, revoke redemption and outright ban ownership of the underlying commodity?

I'm not arguing that a redeemable currency is better or worse than a non-redeemable one. I'm merely pointing out that USD is fundamentally different from an IOU, because the US dollar is non-redeemable and an IOU is redeemable. None of this has anything to do with the status of USD as legal tender, which is something you brought up for reasons that elude me (it looked like you misinterpreted the term 'redeemable' to mean 'legal tender', that's why I was trying to clear this up).

The money is back up by US treasury bonds. When the government wants more cash, they issue new treasury bonds in order to print out more dollars. People buy US treasury bonds as a safe investment that they can cash in 10 years later at a certain % interest based on Federal Reserve interest rate.

If you keep printing out money faster than the economy grows, the money will depreciate. If the money depreciates too much, people lose a lot more money on treasury bonds. When people stop buying US treasury bonds, the government can't spend more/pay their bills.

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