Considering gold as a store of value was key to the world economy for a long time. Many nations such as The United States had a system of currency based on convertibility to gold. This is called the gold standard. In the case of the US, they called it the Gold Bullion Standard. In this system, gold does not circulate in the economy but currency can be exchanged for it.
The standard changed often over time, especially due to important wars or major economic pressures. One of the biggest changes was President Roosevelt nationalizing the nation’s gold in 1934. The motivation behind the move was to combat deflation that was wrecking the American economy. Before the nationalization of gold, the price to convert money into a troy ounce of gold was $20.67. After this program, the conversion price was changed to $35 per troy ounce, to give the economy a chance to recover easier. This approach was largely successful in helping the US recover from the Great Depression.
This iteration of the gold standard was maintained for a long time, though it changed significantly due to the second World War. The Allies met in July 1944 and discussed the global economy at the Bretton Woods summit. This meeting was held to determine many aspects of the post-war global economy. One of these was how to handle exchange rates between countries moving into the post war era. Most countries pegged their currencies to the US dollar with the ability to convert dollars into gold no longer available to individuals or companies – only national banks could convert. To reliably facilitate this new system of exchange, the International Monetary Fund (IMF) was created. Pegging means to arrange a fixed exchange rate of one currency to another.
The Decline of The Gold Standard
This arrangement achieved its goals, giving some stability to a world recovering from war. It was over a decade before the system took its first rattling. The French were the ones to put pressure on this system, under President Charles de Gaulle. He had decided that he wanted to reduce his reliance on the US and their dollar, so he enacted a policy of converting US dollars into gold between 1959 and 1969. This steadily made things harder on US gold reserves.
The slowly building tension from France led to the US having trouble keeping up with gold reserves. This coupled with the economic turmoil from the Vietnam War, as well as more money flowing out of the country than coming in (a balance of payments deficit). Around the same time, the London Gold Pool was also suffering. The creation of the pool was an attempt by the US and major European countries to keep the gold standard running strong. The pool was formed in 1961 and in 1968, it collapsed.
All these issues eventually led to the Nixon administration pausing the convertibility to gold, in August 1971. To address these issues, Nixon and the Group of Ten (most developed nations) drafted the Smithsonian Agreement at the end of 1971 . It introduced many changes such as an increase of the price of gold to $38, pegging the value of the major world currencies to the US dollar with some room for fluctuation, and an end of convertibility to gold. A new arrangement was necessary. Convertibility was no longer a plan that was feasible for the US, due to their lack of gold reserves.
The US kept defining its dollar in terms of gold for a while after this point. It was becoming less and less relevant with the world currencies being pegged, along with the conversion to gold having ceased. The US released a few more changes in the price of gold to fight deflation in the mid 1970s. Eventually in 1976 they gave up and moved to a new definition of the dollar which did not include any ties to gold. Instead, it was purely fiat currency meaning it was inconvertible, relying only on the value perceive it to have.
This re-definition set off a wave of changes in the world. The developed countries of the world startedmoving away from the gold standard, in favor of a free floating fiat currency. This change opened up the benefit of more control of currency by central banks. It also relieved the pressure of holding and administering gold reserves.