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

When a currency is backed by gold, every dollar is equivalent to some unit of gold that the government owns. Your dollar has a physical interpretation: you can, in theory, go to the treasury and redeem your money for a fixed amount of gold.

When a current is off the gold standard, money isn’t backed by a physical asset held by the government. The dollar is backed by the “full faith and credit of the United States”, i.e how much people trust the United States. The buying power of a dollar will depend on how much people trust the government and economy.