Final answer:
The U.S. money supply, including M1 and M2, is regulated by the Federal Reserve Bank. It is not backed by physical reserves like gold but instead by the economic stability and monetary policy controlled by the Federal Reserve and the government's fiscal actions.
Step-by-step explanation:
The money supply in the U.S. is regulated by the Federal Reserve Bank, which is the nation’s central bank and is tasked with monetary policy management. The Fed categorizes money based on liquidity into two main types, M1 and M2 money supply. M1 money supply includes very liquid assets like cash, checkable deposits, and traveler's checks. M2 money supply is less liquid and comprises M1 plus savings and time deposits, certificates of deposits, and money market funds. The backing of the U.S. money supply does not come from a physical commodity like gold but derives from the Federal Reserve's operations and the U.S. government's ability to uphold economic stability.
Historically, the concept of backing currency involved countries maintaining reserves of gold or other assets to sustain a fixed currency value. But modern economies like the U.S. operate on a fiat money system, where currency value is not tied to physical reserves but is instead influenced by supply and demand, the security of the financial system, and the government's capacity to maintain economic order.