Shepherd: A gold standard sets the value of money equal to a specified amount of gold. To maintain a gold standard, governments must be ready and willing to buy and sell gold at a set price.
Economy Museum Director Tom Shepherd enjoyed working with experts to create an interactive gold bar exhibit for visitors to the St. Louis Fed.
Before World War I, almost all developed countries followed some version of the gold standard. After the Federal Reserve was created in 1913, part of its job was to maintain the value of U.S. currency in terms of gold. To accomplish this, the Fed had to have 40 cents worth of gold in its vault for every dollar it issued.
During the Great Depression, demand for goods and services fell and dragged down the U.S. price level. Requiring the Fed to hold gold to create money restricted its ability to stimulate the economy and maintain stable prices. To permit a more active response, the U.S. left the gold standard for domestic transactions in the 1930s.
The 1934 Gold Reserve Act signed by President Franklin D. Roosevelt transferred ownership of the Fed’s monetary gold to the U.S. Treasury. Later, in 1971, President Richard Nixon ended convertibility of dollars to gold for international transactions.
Since then, then U.S. has had a fiat currency system. In a fiat system, money is not backed by a commodity like gold, but rather by the full faith and credit of the government.