Question

The paper money or currency in the U.S. essentially represents:

A. A debt of commercial banks and savings institutions
B. A debt of the U.S. Treasury
C. An asset of the Federal government
D. A debt of the Federal Reserve System

Answer 1

U.S. paper currency today represents a debt of the Federal Reserve System and is considered fiat money, which has value based on government decree and universal trust, rather than a physical commodity like silver.

Step-by-step explanation:

The paper money or currency in the U.S. essentially represents a debt of the Federal Reserve System. Unlike commodity-backed money, such as the silver certificates that existed until 1958, today's currency is fiat money. This means it is inconvertible paper money made legal tender by a government decree. The statement "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE" indicates that by law, U.S. currency can be used to pay debts, despite not being backed by a physical commodity. Instead, the value of the currency is based on universal faith and trust that the currency has value. The M1 money supply measure, which includes currency in circulation and checkable deposits, helps track the liquidity of such money.