USD is backed by nothing, what is Canada dollar backed by?

Question

What is the Canadian dollar backed by? Is it like the USA. I know our debt isn't as bad as the USA debt is, but are we similar to their problems

Answer 1

All currency of pretty much every nation on the planet is not backed by anything.  I think the Swiss backed their currency with Gold up until the late 90s.. But over all money everywhere is backed by nothing more than the faith you put in it.

Answer 2

In the sense that you're referring to, the Canadian dollar is not  backed by anything, but that's also true in every country in the world of any consequence.  But it is incorrect in the economic sense because "money" represents the accumulated value of the nation, from fisheries to farms to factories. National accounts include all economic activities.

National accounts are part of a very complex system in which one narrow segment is somehow related to another that seems to have no connection. People are fond of clear statements that anyone can understand: "if taxes go up, x will happen. If we spend y, it will have z accounts.

If a countries GDP is growing much faster than the national debt or deficit, the money supply is supported by more assets. If the country borrows too much money, especially for non-productive items, the money becomes more and more debased. That's why the Canadian dollar is now roughly equal to the US dollar while 10 years ago the you needed something like1.6 loonies to buy a dollar.

You might own a 10,000 acre farm and only have $10,000 in money. So if each acre is worth $2,0000 , your net worth would be 2,010,000. But what about your debts. It turns out that you owe $400,000 so that takes your net worth down to $1,610,000. But wait, you have a lot of machinery, most of it with a long useful life ahead, that's worth another million today. So, we're now up to $2,610,000.

That's a lot of paper that represents money which is backed by hard assets. Is that what you'd sell it for.  Even as you depreciate your equipment, you are replacing it, but oddly you're not getting much more into debt. That's because you produce cash flow during each year as you market what you grow. Each year, your farm becomes a bit more productive even though the wages of your workers go up in money terms. How many workers would agree to accept a fixed amount of the crop equivalent to the wage. He wouldn't know how to sell it. If you're like most largish farmers, you sell hedges and collars on your crop (which is insured against failure), so that you have a price floor that can keep raising while you will only give up a limited part of any higher price. The market says there is a dollar value on that crop. If your crop does well, you have earned unexpected profit which you might invest in in more acreage or more efficient equipmnet or another worker who can help you diversify into a high profit crop on some acreage. Rather the buying acreage, you may decide to rent, setting a price that will allow you to earn much more from increases in production costs due to the advantages of scale.

If you go through all those steps (and the others left out), you'll see that there are relatively few cases where "money"  is exchanged. Your debt on the big combine is paid to a bank which has has collateral. In terms of national accounts, each added value item increases the National Asset base. An increase in production increases GDP. Each step you've taken, whether debt or spending, affects the local economy and the national economy.

We don't have the room for all the paper that would be needed if we had to have a piece of currency for each one of these uses of "money." If Gold was involved, it would wind up being stored in a vault .. and if national account's go one way for too long, then they'll change the labels on the stacks of gold. Political economics is always popular.

With money, you run into the problem like this. You refuse to work except for backed up money. You're fired. You decide to keep the job, but you want it in cash. You're not hired. You ask for a check and you're told no. Finally, you agree, you'll accept $25 million a year in a direct 2-deposit every money. You write checks against an account for that purpose. If you just leave the money in a checking account, it's all counted as money just as though it was cash.

Governments damage the exchange value of money not by failing to make a hard link with gold or cows, but through a too rapid increase in the money supply.  It is possible to reduce the  money supply. That was U.S. polic, depending on who was in office,  from Grant's administration on.

With a tight money supply, no one can afford to pay a fair price, so you cut it into half. You don't buy the tractor because interest rates and borrowing conditions are too high.  Money and Banking are in economic terms a very esoteric segment of the conomy.

You are right that the Canadian debt is substantially less than the U.S. on a per capita basis, about $22k compared to about $28 on the last economic report I read. The debt for Canada is about $c 850 Billion. That figure comes from the CIA. Your lower debt results from a more conservative approach to finance than ours.  

The last vestiges of the gold standard were wiped out by Richard Nixon, ending the Breton Woods Agreement on fixed exchange rates and uses of gold.

But there was never enough gold to back all the currency and a fixed relationship, while it avoided inflation, also imposed fairly rigid limits on the economic growth demanded by a capitalist system.

The real problem is that talking about currency or coinage  as money falls short of the definition of money inferred under any modern economist, starting with Adam Smith. Money in whatever form it takes is a medium of exchange. That applies to gold or Silver. Even barter has an implicit money value. And there are different measures of money, starting with a fairly limited definition called M1 to a wider standard called M2 and while the Fed no longer releases M3, that is an even broader measure.

The rest of this post is an excerpt from Adam Smith's Book II of the wealth of nations

In computing either the gross or the neat revenue of any society, we must always, from their whole annual circulation of money and goods, deduct the whole value of the money, of which not a single farthing can ever make any part of either.   14

  It is ambiguity of language only which can make this proposition appear either doubtful or paradoxical. When properly explained and understood, it is almost self-evident.   15

  When we talk of any particular sum of money, we sometimes mean nothing but the metal pieces of which it is composed; and sometimes we include in our meaning some obscure reference to the goods which can be had in exchange for it, or to the power of purchasing which the possession of it conveys. Thus when we say, that the circulating money of England has been computed at eighteen millions, we mean only to express the amount of the metal pieces, which some writers have computed, or rather have supposed to circulate in that country. But when we say that a man is worth fifty or a hundred pounds a-year, we mean commonly to express not only the amount of the metal pieces which are annually paid to him, but the value of the goods which he can annually purchase or consume. We mean commonly to ascertain what is or ought to be his way of living, or the quantity and quality of the necessaries and conveniencies of life in which he can with propriety indulge himself.   16

  When, by any particular sum of money, we mean not only to express the amount of the metal pieces of which it is composed, but to include in its signification some obscure reference to the goods which can be had in exchange for them, the wealth or revenue which it in this case denotes, is equal only to one of the two values which are thus intimated somewhat ambiguously by the same word, and to the latter more properly than to the former, to the money’s worth more properly than to the money.   17

  Thus if a guinea be the weekly pension of a particular person, he can in the course of the week purchase with it a certain quantity of subsistence, conveniencies, and amusements. In proportion as this quantity is great or small, so are his real riches, his real weekly revenue. His weekly revenue is certainly not equal both to the guinea, and to what can be purchased with it, but only to one or other of those two equal values; and to the latter more properly than to the former, to the guinea’s worth rather than to the guinea.   18

  If the pension of such a person was paid to him, not in gold, but in a weekly bill for a guinea, his revenue surely would not so properly consist in the piece of paper, as in what he could get for it. A guinea may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighbourhood. The revenue of the person to whom it is paid, does not properly consist in the piece of gold, as in what he can get for it, or in what he can exchange it for. If it could be exchanged for nothing, it would, like a bill upon a bankrupt, be of no more value than the most useless piece of paper.   19

  Though the weekly or yearly revenue of all the different inhabitants of any country, in the same manner, may be, and in reality frequently is paid to them in money, their real riches, however, the real weekly or yearly revenue of all of them taken together, must always be great or small in proportion to the quantity of consumable goods which they can all of them purchase with this money. The whole revenue of all of them taken together is evidently not equal to both the money and the consumable goods; but only to one or other of those two values, and to the latter more properly than to the former.   20

  Though we frequently, therefore, express a person’s revenue by the metal pieces which are annually paid to him, it is because the amount of those pieces regulates the extent of his power of purchasing, or the value of the goods which he can annually afford to consume. We still consider his revenue as consisting in this power of purchasing or consuming, and not in the pieces which convey it.   21

  But if this is sufficie

Answer 3

The Canadian Central Bank holds a significant amount of foreign reserves in Dollars, Yen, and Euro's . The  amount on 23 May 2008 is  $44.115 billion. It contrasts with the  $48.593 billion in currency that is circulating as of May 2008. The ratio is 90.8%.  Canada tends to hold a large foreign reserve relative to the value of it's own currency. Over $20 billion of the $44.115 billion is in US dollars.

     Of course, the USA has about $75 billion in foreign reserves which is equal to about 7% of it's currency in circulation.

   All currency in the world now is fiat currency which is money that has value primarily because a government demands it in payment of taxes, and that government has credible enforcement of its demand. It is not backed by specie (precious metal, such as gold). Canada has sold most or all of it's gold, in contrast to USA which has sold none of it's gold. Switzerland was the last country to drop it's constitutional requirement that it's currency be backed by gold.

    I don't think that the question of what the currency is backed by is as relevant as how much is being printed. Canada distributes enough currency to serve the domestic economy.

   Although the US dollar has always been a "world currency" it wasn't until 1992 when the Soviet Union fell and  the US trade deficit began widening that the US began to print $100 bills like they were toilet paper. About 80% of these $100 bills are circulating overseas (it's hard to estimate this number with exact certainty). It would literally be a line of dumptrucks full of $100 bills several miles long.

   Unlike Canada, the USA is actually buying goods and services from other countries with their currency. It's a good deal to buy stuff for paper while it lasts, but if people stop taking the paper you are in big trouble.

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  As long as I'm ranting, I'm glad that Canada stopped printing it's $1000 banknote. Legitimate business does not need a note this big. Switzerland has a $1000 banknote, but it's basically a note that this historically conservative citizens uses to hide their savings. I thought it was very cynical of the European Union to not only print a 500 euro note, but to print such a huge number of them. You are basically pandering to the drug, prostitution, and smuggling trade.

Answer 4

All paper currencies are fiat based, meaning they are backed by their government. As a private citizen your paper is garbage.   Who says Canadian debt isn't bad? Bad debt is all relative to income. If you make $10 a year and you owe $100 you are in bad shape. I don't think $10 trillion is so bad, US GDP is $13 Trillion.

Answer 5

All industrialized countries' currencies are backed by bonds of their respective governments.  A modern central bank issues currency in the amount of government bonds it has on hand.  So you can say that currencies are backed by the governments' power to tax.