Money as a concept has been around for hundred of years. Prior to paper or fiat money as we know it nowadays, there was coins made from silver and gold which present the monetary medium for a society.
With the introduction of paper money, Banks started to issue bills that are lot easier to denominate store and spend.
Money Backed by Gold
There was always a key behind printing and issuing these paper money, Some reserves backed this money. Which means, that the dollar you have in hand, you could theoretically exchanged it to some precious metals. In most cases, this was “Gold”.
This convertibility mechanism of paper money, creates a certain level of confidence among those who held it.
This consensus limited also the potential of the damaging inflation for the economy, because the amount of money issued in the system is naturally limited by the amount of gold that is kept in reserves.
During the great depression, the convertibility from dollar to gold was an oppressing issue for the federal reserve, because simply, it limits the money supply and leads to a deflation which is damaging the economy.
The FDI, afterwards issued an executive order which makes owning gold illegal, and require everyone to convert it into US dollar.
In a short time frame, the Oz of gold jumped from $20 in 1933 to $35 in 1934. Which depreciated the US dollar, therefore, that executive order comes to set a governance price for the gold.
For US governance, the gold standards was not ideal, but at least it kept a certain degree of confidence in the value of money and when applied correctly, it could prevent hyper inflation.
Bretton Woods Agreement
US Dollar at center
In 1944, Most of countries who were adopting the gold standards, signed what we call the Bretton Woods agreement. This agreement states that, all national currencies should have the value in relation to the dollar. This agreement made therefore, the US Dollar, the dominante reserve currency.
Currencies were convertible to dollar therefore to gold at a fix rate of $35 per ounce.
The Bretton Woods agreement had a decent run until 1971, when Richard Nixon, the 37th U.S. President made his pitch to terminate the convertibility of USD into Gold. Nixon set the wheels and motions for the current fiat money system that we know today, A glorified confidence game backed by nothing.
In August 1971, Nixon states that the US government will suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in a amount and conditions that serves the dollar stability and interest.
This suspension turns out to be permanent and it ended up all sort of illusion that dollar or other currencies would have a conversion to gold.