What does this mean when the dollar or currency is "backed" by something?

In the olden days the currency used to say: "payable in gold to the bearer on demand" which meant that for every dollar out there, there was a dollar's worth of gold sitting in a government vault to back it up, and you could exchange your paper money for gold. Then it changed to silver with the same rules. Now they're all federal reserve notes... and I'm not sure what those really are.

no currency is backed by anything (gold was used)

The first thing you have to realize is that money is a collective delusion. It only exists because we collectively believe it exists. The reason we believe in its existence is because it makes life easier for everyone. Commerce would grind to a near halt if you needed to come up with a bushel of wheat to pay for a haircut, and your barber had to somehow trade that bushel into the pair of shoes that his mechanic wanted in exchange for changing the oil in the barber's car. Instead, your barber agrees to accept pieces of green paper that REPRESENT the value of a bushel of wheat. Similarly, his mechanic accepts pieces of green paper that REPRESENT the value of a pair of shoes. Back in pre-Industrial times, money was minted out of gold. Not because gold is particularly valuable, but because gold has the following properties that make it good currency: 1) It's hard to counterfeit 2) It's pretty much useless for anything else (dentistry and electrical contacts notwithstanding) 3) There's not a lot of it lying around, so the money supply is reasonably stable. Many people believe that going back to a system where the green pieces of paper represent a fixed quantity of gold (or some other useless commodity) would be better than our current system. However, what these people fail to realize is that even in a specie-backed currency system, about 90% of the money supply is still fiat money. Why? Consider the situation where you deposit $1 at your bank. Your bank can loan out about $8 to $10 on the basis of that one dollar deposit. Where did that extra $7 to $10 come from? From our collective belief that the money exists. The bank is (hopefully with good reason) reasonably sure that the people who borrow that money will pay it back. They are also reasonably sure that not every depositor will want their money back at the same time, so the bank can return depositors money as needed. In modern times, we have come to accept that using green pieces of paper to represent real wealth is not inherently worse than using pieces of pretty (but useless) metals. The one advantage of pieces of pretty metal relates to your question about debt. The governments, businesses, and people of the United States have been on a massive debt binge since the end of WWII. This trend was greatly exacerbated by our decision to cut taxes on the wealthy while fighting two land wars in Asia over the past 10 years. There are many historical examples of severely indebted nations (e.g. post WWI Germany) printing paper money far in excess of the real wealth output of the country/society. When this happens, the number of paper pieces per unit of real wealth goes way up (i.e. hyperinflation). Economies have a difficult time operating during hyperinflation. The one advantage of specie currency (pretty metal) is that it's much harder to gin up additional supplies. Unless a country discovers a huge new source of pretty metal, its money supply is somewhat fixed. Some people are concerned that the United States is headed toward a situation like post-WWI Germany. I think their analysis of the situation is simplistic. Yes, we are in for tough economic times. Anyone who has ever dug themselves out of debt knows what that's like. But that doesn't mean were going to collapse into social chaos the way the Weimar Republic did.