What Is Irredeemable Debt?

The concept of irredeemable debt in the United States is something that has had an effect on our economy, as well as on how we are capable of using our money in general. Today, countries around the world operate their finances on this principle, as it has taken precedence over the gold standard as a way of ensuring a country's wealth.

Definition

If something is irredeemable, it cannot be bought back or paid off. In the case of irredeemable debt, what cannot be bought back is money. This refers to the standard currency that is printed by the government of the United States and other countries around the world. In short, the money is irredeemable because it cannot be backed up dollar for dollar by other wealth possessed by that country. In most cases when money was redeemable it was backed by gold.

Gold Standard

Prior to 1971, the United States followed what was referred to as the "gold standard." Most well developed countries of the world also followed either the same or a similar method. Each country chose to print a certain amount of money in conjunction with their gold reserves. Countries set different prices per ounce of gold; therefore, depending on what that was, their dollar could be worth more or less in comparison to other countries. Debt was redeemable at this time in the sense that the government had gold in reserve to buy back the currency in circulation. Printed money could be redeemed for its equivalent in gold.

Nixon

In 1971, amidst a recession, President Richard Nixon chose to take the United States officially off the gold standard. This was an attempt to allow the government to print more money to potentially aid in the stimulation of the economy. From this point forward, the United States has lived on the financial principle of irredeemable debt.

Flat Dollars

Flat dollars are money printed by the government that are not backed by any other kind of physical wealth. The printing of flat dollars is what creates irredeemable debt. Since, by definition, the currency is not backed by gold or other hard wealth, it cannot be redeemed for it.

Effects

Since the divorce from the gold standard, the value of the United States dollar has declined significantly. This is due to many factors, the biggest of which being that the Federal Reserve now has the power to print as much money as it sees fit to maintain harmony. Dollars that are printed today by the government are backed only by the laws that state they are legal tender for goods, as well as the acceptance of citizens to use that form of currency for purchases.