The Gold Standard

The following is a transcript of "Money Girl's Quick and Dirty Tips for a Richer Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Hello and welcome to Money Girl's Quick and Dirty Tips for a Richer Life.

Today's topic: The gold standard.

In last week's episode, I explained that the U.S. dollar, like most currencies throughout the world today, is a fiat currency, meaning that it's backed by faith, rather than something physical of value.

But this hasn't always been the case. There was a time when the U.S. dollar was backed by something more tangible than faith, and that something was gold.

After last week's episode, a listener named Pam S. emailed me with this question: "Why isn't the U.S. dollar still backed by gold and why did FDR recall all gold coins?"

A Brief History of the Gold Standard

To get to an answer to this question, let's take a quick look at the history of the gold standard.

In 1900, the United States and most of Europe adopted a monetary system based on gold. The Gold Standard Act of 1900 made paper dollars convertible to 1.5 grams of gold. A troy ounce of gold (which is one-twelfth of a pound) was a little over $20.(1) In practice, most people used paper dollars because of their convenience, and didn't often redeem them for gold.

If you take a close look at a U.S. dollar bill today, you'll see the words "Federal Reserve Note" printed on it. You'll also see the words "This note is legal tender for all debts public and private."