Eli5 what it means when a currency is said to be backed by gold

Question

I see this all the time, mostly when references are made about the dollar and how it was once backed by gold

In: 164

Answer 1

Here’s this piece of paper and on it is written pinky promise that you can exchange it for a piece of gold if you want to. Thats what gold backing means.

It’s kind of a stupid arrangement. The state gets monetary policy dictated to it by mines and the people don’t get quite what it says on the tin. If ever there was en masse bankrun to really get these pieces of gold, there is a very good chance the central bank would have come short.

If you want a precious metal then they sell it by weight, buy the real thing. If you want an medium of exchange, then modern money is better at it.