History of Gold Standard

In the mid-1800's, countries began adopting the gold standard as a way to standardize transactions in a blossoming world trade market. By World War I, most countries were on the gold standard, with mixed results. Between 1914-1919, most countries suspended the gold standard so they could print enough money to pay for their involvement in the war. After the war, countries returned to a modified gold standard, but abandoned it during the Great Depression. (History.com, "Gold Standard")

In 1941, most countries adopted the Bretton-Woods system, which set the exchange value for all currencies in terms of gold. It obligated member countries to convert foreign official holdings of their currencies into gold at these par values. However, many countries simply pegged the value of their currency to the dollar, thus making the dollar the defacto world currency. Gold was set at $35 per ounce. (Source: National Mining Association, History of Gold)

The strong dollar led to inflation and a large balance of payments deficit in the U.S. which in turn helped to create stagflation. The U.S. started to deflate the dollar in terms of its value in gold to curb double digit inflation.

In 1971, gold was repriced to $38 per ounce, then again to $42 per ounce in 1973. As the dollar devalued, it motivated people to sell their greenbacks for gold. Finally, in late 1973, the U.S. government decoupled the value of the dollar from gold altogether. The price of gold quickly shot up to $120 per ounce in the free market.