Today, gold doesn’t play a significant role in monetary policy, but that wasn’t always the case. Until the 1930’s, the United States as well as most developed countries operated on the Gold Standard. This means that the value of a country’s currency is directly linked to gold.
When countries conducted monetary policy using the gold standard, they converted paper money into a fixed amount of gold. This set a fixed price for gold and countries would buy and sell gold at that price. Countries that were running trade surpluses increased their gold supply as payment for their exports. Conversely, countries running a trade deficit saw their gold supply shrink as they received imports.
The world wars of the early twentieth century were the catalyst for many countries moving away from the gold standard. And in 1944, the Bretton Woods Agreement effectively ended the gold standard. However, it wasn’t until 1971 that the United States announced it would no longer exchange gold for U.S. currency.