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

It basically means that every dollar represents 1 dollar’s worth of actual gold hidden in a vault somewhere.

Because gold is really expensive, it’s not convenient to use for small, daily transactions like buying groceries, so you use a proxy as currency instead, like paper money. But what gives the person confidence in accepting paper money is believing in the gold.

That’s basically what the first cheques were. Goldsmiths would have vaults full they held for people and instead of me going there, getting gold, and giving it to you, I would write a note explaining to the smith to give you some of my gold. You could then sign that over to someone else, and *they* would then have permission to go get the gold.