The Gold Standard

When dollars were backed by gold, the words printed on bills were different. For example, in the case of a $50 bill they read, "This is to certify that there is on deposit in the Treasury of the United States of America $50 in gold coin payable to the bearer on demand." These gold-backed bills were literally gold-backed: the backside of the bill was printed in yellow. For those of you who are curious to see what these gold-backed bills looked like, click here.

FDR Makes Owing Gold Illegal

Well, during the widespread bank failures of the Great Depression, many people and institutions both in the U.S. and around the world actually did redeem their dollars for gold, which drained the Federal Reserve's gold supply. In response to this crisis, in 1933 President Franklin D. Roosevelt made private ownership of gold illegal and confiscated gold by executive order. U.S. citizens had to turn in their gold and gold-backed paper money to the central banking system and were paid a little over 20 paper dollars for each troy ounce of gold, which had been the official gold price since 1900.

After the gold confiscation, the U.S. government reset the price of gold to $35 per troy ounce, which, in one fell swoop, devalued the dollar by more than 40%.

The Dollar Becomes the Preeminent World Reserve Currency

During World War II, delegates from 44 countries signed an agreement called Bretton Woods that fixed the dollar to gold and fixed other nations' currencies to the dollar. Under this agreement, the dollar was defined as 1/35th of a troy ounce of gold and could be redeemed for gold at this rate by foreign governments and central banks. This agreement established the U.S. dollar as the world's preeminent reserve currency, replacing the British pound sterling. But private ownership of gold by U.S. citizens remained illegal.