Watch: how money works (65s)
Watch: how money turned into numbers on a screen (65s, sources on screen)
Educational only · Not financial advice
Money is anything people widely accept as payment. It works because of trust: you take a dollar for your work because you're confident the next person will take it from you. Shells, silver coins, paper notes and numbers in a bank app have all done the job.
The three jobs money does
- Medium of exchange. You can trade with it.
- Unit of account. It's a common yardstick for prices, so you can compare a coffee, a car and a paycheck in the same units.
- Store of value. You can hold it and spend it later. How well money keeps its buying power over time is where most of the arguments start.
A short history: barter to fiat
Barter. Trading goods directly only works when each side wants what the other has. That's why societies settled on common forms of money.
Commodity money. For thousands of years the favorites were gold and silver. They're scarce, durable, divisible and hard to fake. The US built its money on both metals. The Coinage Act of 1792 created the US Mint and defined the dollar as 371¼ grains of pure silver (about 0.77 troy ounce), with the $10 gold eagle set at 247½ grains of pure gold, a 15-to-1 ratio.
Representative money. Paper notes took over, each a promise that could be exchanged for gold or silver, like US gold and silver certificates.
Fiat money. Fiat is Latin for "let it be done." Fiat money is money because the government says so and people trust it, not because it can be swapped for metal. Today nearly every currency, including the dollar, is fiat.
Three turning points for the dollar
1933: gold called in. On April 5, 1933, President Franklin Roosevelt signed Executive Order 6102. It required Americans to hand most gold coin, gold bullion and gold certificates to the Federal Reserve by May 1, at the official price of $20.67 an ounce, with exceptions for small amounts, collector coins and industrial use. The Gold Reserve Act of January 1934 then reset gold to $35 an ounce, which made the dollar worth less gold (Federal Reserve History). Americans couldn't legally own gold bullion again until the end of 1974.
1965: silver leaves your pocket change. With Treasury silver running low, the Coinage Act of 1965, signed July 23, 1965, switched dimes and quarters to copper-nickel clad coins and cut the half dollar from 90% to 40% silver. By 1971, no circulating US coin contained silver (US Mint).
August 15, 1971: the gold window closes. Under the post-war Bretton Woods system, foreign governments could swap dollars for US gold at $35 an ounce. On August 15, 1971, President Nixon closed that "gold window." In the words of Federal Reserve History, the international monetary system "turned into a fiat one." Since then nothing has backed the dollar but law and trust.
How money is created today
Most money today isn't cash. It's bank deposits. The Bank of England's 2014 paper "Money creation in the modern economy" explains that when a commercial bank makes a loan, it doesn't hand over someone else's savings. It credits the borrower's account with a brand-new deposit, which is new money.
Central banks such as the Federal Reserve sit above this. They mainly steer how much lending happens by setting interest rates. They can also create bank reserves directly by buying assets like government bonds, which is known as quantitative easing. Physical cash is a small slice: in August 2026, currency was about $2.39 trillion out of about $23.34 trillion of M2 (Federal Reserve H.6 release).
M1 vs M2
M1 is money you can spend right away: currency, checking accounts and other liquid deposits. Since May 2020 that has included savings accounts, which is why M1 jumped that year and is now close to M2. M2 is M1 plus small time deposits (CDs under $100,000) and retail money market funds. In 2026-08, M1 was $19.99 trillion and M2 was $23.34 trillion (seasonally adjusted, Federal Reserve via FRED series M1SL and M2SL).
Why gold and silver fans care
Fiat money and bank deposits can be created in any amount, while new gold and silver have to be mined, which adds only a little each year. So they see metal as a check on paper money: something that can't be printed, and that was money in the US for most of the country's history.
Plenty of economists see it differently. They argue that a fixed metal supply can choke growth and made crises like the Great Depression worse, and many credit leaving gold in 1933 with helping recovery (Federal Reserve History). VaultPulse doesn't take sides or predict prices. Explore the numbers yourself:
- Spot vs M1 calculator: what gold and silver would be at any percentage of M1 backing (hypothetical).
- Paper to metal: the US money supply compared with gold reserves and COMEX silver.
- Silver squeeze tracker: deliverable silver, deliveries and premiums in one view.
- COMEX silver inventory: registered vs eligible silver, dated.
- Fun history: the Wizard of Oz and silver: the 1890s gold vs silver fight hidden in a fairy tale (a popular theory).
Educational only. Not financial advice and not a price prediction.
Sources
- Bank of England (2014): Money creation in the modern economy
- Federal Reserve: H.6 Money Stock Measures (released Sept 22, 2026)
- FRED: M1SL
- FRED: M2SL
- Federal Reserve History: Nixon ends convertibility of US dollars to gold
- Federal Reserve History: Roosevelt’s gold program
- Executive Order 6102 (1933)
- Coinage Act of 1965, Public Law 89-81 (congress.gov PDF)
- US Mint: historic coin production
- Coinage Act of 1792
FAQ
Is the US dollar backed by gold or silver?
No. Americans lost the right to swap paper money for gold coin in 1933, and on August 15, 1971 President Nixon ended the last link by closing the gold window to foreign governments. Since then the dollar has been fiat money, backed by law and trust rather than metal.
Do old US dimes and quarters contain silver?
Yes. Circulating dimes, quarters and half dollars dated 1964 and earlier are 90% silver. The Coinage Act of 1965 switched dimes and quarters to copper-nickel clad and cut the half dollar to 40% silver.
What is the difference between M1 and M2?
M1 is money you can spend right away: cash, checking accounts and, since May 2020, savings deposits. M2 adds small time deposits (CDs under $100,000) and retail money market funds. Both are published monthly by the Federal Reserve.
Do banks just lend out the money savers deposit?
Not quite. As the Bank of England explained in 2014, when a bank makes a loan it creates a new deposit in the borrower's account, which is new money. Central bank policy, mainly interest rates, limits how much lending happens.