The gold standard: how was paper money tied to gold for 150 years?

What is the banknote in your wallet, really? Today it is a sign of trust in the state and the central bank. In the 19th century, however, it was a far more "material" promise: "Bring us this piece of paper and we will give you a set amount of gold." This system of promises is called the gold standard, and for almost a century and a half it was the "measuring ruler" of world finance.

Key points

The return after the war. The Bank of England suspended the conversion of its notes into gold from 1797; this situation lasted through the long wars with France and after them, until 1821 (University of St Andrews research). According to Britannica, the gold standard was first adopted precisely in Britain, in 1821.
The 1870s: spreading around the world. Britannica writes that Germany, France and the USA introduced the gold standard in the 1870s. According to the EH.net table, Germany was on a gold coin standard from 1871 to 1914. Economists usually call 1880–1914 the era of the "classical gold standard" (Econlib).
The First World War. Governments needed a lot of money for war spending. Econlib notes that once the war began, countries abandoned the obligation to convert banknotes into gold: in wartime this was the usual practice.
1925: back to the old parity. According to the parliamentary record (Hansard), Chancellor of the Exchequer Winston Churchill announced Britain's return to the gold standard in his budget speech on 28 April 1925. The pound sterling was returned to its pre-war parity, that is, roughly 1 pound = 4.86 dollars. In the view of critics, restoring the old rate after the war made the pound overvalued and made British goods expensive for foreign buyers.
1931–1934: the Great Depression. As pressure on the gold reserves grew, Britain left the gold standard on 21 September 1931 (The Spectator, 1931). Britannica writes that the USA followed the same path in early 1933. The Gold Reserve Act of 30 January 1934 raised the dollar price of gold from 20.67 dollars to 35 dollars per ounce (Federal Reserve History website).
Bretton Woods: a "half" gold standard. After the Second World War other currencies were pegged to the dollar, and the dollar to gold at 35 dollars per ounce; on 15 August 1971 President Nixon announced that the conversion of dollars into gold was suspended (Federal Reserve History website). We have a separate article about this system.
1971: the final point. Britannica notes that because of shrinking gold reserves and a worsening balance of payments, the USA stopped the free conversion of the dollar into gold in 1971. With this the history of the gold standard came to an end: today's currencies rest not on gold but on central bank policy and trust.

Then and now

Aspect	The gold standard era	Today
What a banknote rests on	The gold reserve in the bank and the promise of conversion	Central bank policy and trust in the state
What limits the amount of money	The size of the gold reserve	Central bank decisions (the interest rate and other tools)
Exchange rates	Almost fixed through gold parities	Fluctuate on the market in many countries
Main risk	If gold runs short, a shortage of money in the economy	If too much money is issued, inflation

Example: how did the 1934 revaluation work?

The calculation below is based on the official 1934 prices, while the company is invented (compiled by the author).

Suppose a hypothetical company called "Zarafshon savdo" keeps 100 ounces of gold in its vault.

Indicator	Before 1934	After the 1934 act
Price of 1 ounce of gold	20.67 dollars	35 dollars
Dollar value of 100 ounces	2 067 dollars	3 500 dollars
Gold per 1 dollar	1 ÷ 20.67 ≈ 0.0484 ounce	1 ÷ 35 ≈ 0.0286 ounce

Calculation: 3 500 ÷ 2 067 ≈ 1.69, i.e. the dollar price of gold rose by about 69%. Looked at from the other side, 0.0286 ÷ 0.0484 ≈ 0.59: the gold behind one dollar fell by about 41%. The gold did not change; what changed was the "weight" of the dollar. This is also the essence of today's concept of devaluation: the national monetary unit becomes cheaper relative to another asset (no longer gold, but other currencies).

Link with the previous period: in the era of the VOC and the Amsterdam exchange trade ran on silver and gold coins, whereas the gold standard officially tied paper money to gold. The next stage, the Bretton Woods system, kept this link only between states.