Prior to 1971, the United States was on various forms of a gold standard where the value of the dollar was backed by gold reserves and paper money could be redeemed for gold upon demand. Since 1971, the United States dollar has been a fiat currency backed by the "full faith and credit” of the government and not backed by, valued in, or convertible into gold.
Proponents of the gold standard argue it provides long-term economic stability and growth, prevents inflation, and would reduce the size of government. They say a gold standard would restrict the ability of government to print money at will, run up large deficits, and increase the national debt. They say the economy has historically performed best under a gold standard.
Opponents argue a gold standard would create economic instability, spur periodic economic deflation and contraction, and hamper government's ability to stimulate the economy and reduce unemployment during recessions and financial crises. They say returning to a gold standard would be extremely difficult given the scarcity of gold and could severely harm the already fragile US economy.
Since its founding in 1776, the United States has had a variety of monetary systems including bimetallic systems where the dollar was backed by both gold and silver (1792-1862), a fiat monetary system (1862-1879), a full gold standard (1879-1933), and a partial gold standard (1933-1971). From 1971 to present the United States has been on a fiat monetary standard. 
1792-1862: The Bimetallic Standard
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Image of first United States gold coin - the 1795 Gold Eagle. Source: Stack's Bowers Galleries, "Brilliant Uncirculated 1795 Eagle with Reflective Fields," stacksbowers.com (accessed Dec. 31, 2012)
In 1792, Congress passed the first Coinage Act, establishing the US Mint to provide official coin currency for the nation's bimetallic monetary system (dollar valued in gold and silver). The Act fixed the dollar as the equivalent of 24.75 grains of gold and 371.25 grains of silver.  For example, the first US Gold Eagle coins produced by the Philadelphia Mint in 1795  had a face value of $10 and contained an equivalent value of actual gold (270 grains).  Although gold and silver coins circulated, paper money (backed by gold and silver reserves) was also printed and circulated by banks and the US Treasury.  During this time period large silver finds in Mexico and South America caused a decline in the market value of silver relative to gold, resulting in an influx of silver flowing to the US mint for coinage. Gold coins began to leave circulation as their metal content became worth more than their face value. 
To bring gold coins back into US circulation, on June 28, 1834 Congress passed the Coinage Act of 1834, and reduced the gold value of one dollar to 23.2 grains of gold.  Gold discoveries in Russia, Australia, and California in 1848 significantly increased the amount of gold on the market, and further reduced its value in comparison to silver. In 1849, the gold influx caused congress to authorize the minting and circulation of a $1 gold liberty coin, the smallest US coin that has ever existed.  By 1850, the silver content of coins was worth more melted down than the face value of the coin, and silver coins began to disappear from circulation. 
1862-1879: The Civil War Fiat Standard
In Feb. 1862, less than one year after the outbreak of the Civil War, the United States passed the Legal Tender Act, authorizing the issue of the first paper fiat currency. These bills, known as "greenbacks," were not backed by gold or silver, but only by the "full faith and credit" of the federal government. To help finance the Civil War, the Union issued nearly $450 million of these greenbacks (and $500 billion in war bonds).  During the Civil War, the Union states experienced inflation of up to 80%,  and some believed the new greenbacks in circulation had been a contributing factor. Aside from the inflation, by the end of the war in 1865 the federal government had also amassed a $2.7 billion national debt (up from $65 million in 1860). 
In an attempt to move to a gold standard after the Civil War, the government began reducing the amount of money in circulation by destroying the greenback bills. Between 1865 and 1868 price levels in the country fell 25%.  By this time, a national debate was ensuing over whether or not the government had a legal right to issue fiat currency. Creditors who were angry over the war time inflation, which they believed the greenbacks had created, took the issue to court.  In 1871, the legality of fiat currency was upheld 5-4 by the US Supreme Court in the case of Knox v. Lee. 
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1896 Political cartoon of William Jennings Bryan holding a "cross of gold." Source: Cartoon by Grant Hamilton, printed in Judge Magazine, 1896, authentichistory.com (accessed Dec. 31, 2012)
In 1873 the Fourth Coinage Act ended the ability to exchange silver at a fixed price, discontinued government production of silver dollars, reduced the money supply, and moved the country closer to a gold standard.  Shortly after the Act passed, the collapse of a large banking house (Jay Cooke & Co) triggered the "Panic of 1873." During the panic, 101 banks failed as people rushed to withdraw their savings. A period of deflation and financial depression ensued.  In 1874 people upset over the effects of deflation formed the Greenback party to advocate against the gold standard.  They favored inflationary policies that would expand the money supply with silver currency and government-issued paper bills.  This populist movement was countered by advocates of the gold standard known as "gold bugs" who favored a deflationary monetary policy.  On Jan. 14, 1875, advocates of the gold standard won a victory when Congress passed the Specie Payment Resumption Act, which mandated that beginning on Jan. 1, 1879, all greenbacks still in circulation would become redeemable in gold. 
1879-1933: The Gold Standard
Throughout the 1890s debate continued between backers of the gold standard, represented by bankers and financial interests who feared inflation, and the advocates of an expanded silver currency, primarily farmers and laborers, who were being hit hard by deflation. In 1893, another banking panic hit, triggering a deep depression  and the failure of over 500 banks.  The crisis of 1893 further fueled debate in the country over monetary policy giving rise to the Free Silver Movement, a populist coalition of farmers and laborers.  The debate over the gold standard culminated in the presidential election of 1896 between Republican William McKinley, an advocate of the gold standard, and populist Democrat William Jennings Bryan, who opposed it. 
Bryan, an advocate of free silver, made the issue of the gold standard central to his campaign. His speech to the Democratic national convention became known as the "cross of gold," speech where he stated: "Upon which side will the Democratic party fight: upon the side of the ‘idle holders of idle capital’ or upon the side of ‘the struggling masses?’… If they dare to come out in the open field and defend the gold standard as a good thing, we will fight them to the uttermost… You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold."  The Republican Party Platform of 1896 articulated their opposing position: "The Republican party is unreservedly for sound money. It caused the enactment of a law providing for the redemption of specie payments in 1879. Since then every dollar has been as good as gold. We are unalterably opposed to every measure calculated to debase our currency or impair the credit of our country. We are therefore opposed to the free coinage of silver... All of our silver and paper currency must be maintained at parity with gold."  McKinley won the 1896 election, and on Mar. 14, 1900, he signed the Gold Standard Act, officially ending the use of silver as a standard for US currency and formally putting the United States on a gold standard. 
On Dec. 23, 1913, President Woodrow Wilson signed the Federal Reserve Act into law.  The Federal Reserve System was created, in part, as a response to the severe financial panic of 1907 and other past financial crises.  The Act allowed the Fed to print paper money (Federal Reserve notes) that could be lent to banks when the need for cash arose, and required that at least 40% of the value in circulating notes be held in gold reserves.  In 1914 World War I began and many nations abandoned their gold standards – with the exception of the United States.  During WWI (and into the 20s) gold flowed into the Federal Reserve from Europe as payment for US imports. By 1929 the Federal Reserve banks held $3.12 billion in gold – twice the amount that was necessary to back the Federal Reserve notes in circulation. 
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1900 political poster of President William McKinley standing on a gold coin. Source: Michael O'Malley, "History 398, The American History of Money," chnm.gmu.edu (accessed Dec. 31, 2012)
On Oct. 24, 1929, the US stock market crashed.  Between 1929 and 1931, as the Great Depression took hold, the Federal Reserve pursued a policy of deflation - it allowed the money in circulation to drop in relation to its gold reserves.  Between 1930 and 1932 cumulative deflation hit 30%.  By 1933 economic uncertainty, and the failure of nearly 10,000 banks over a three year period,  caused an explosion in public demand to redeem Federal Reserve notes for gold. By early Mar. 1933, the Fed's gold reserves were below the legal 40% limit,  and the full gold standard system began to fall apart.
1933-1971: The International Gold Exchange Standard
In response to the deepening economic crisis, on Mar. 6, 1933, President Roosevelt declared a three-day banking holiday and suspended the ability to redeem paper money for gold. Three days later on Mar. 9, he signed the Emergency Banking Act, giving himself emergency powers over banking transactions and gold policy,  and on Apr. 5, he issued an executive order forbidding the private possession of gold (gold jewelry and coins with numismatic value were exempt). All monetary gold coins, bullion, or gold certificates over $100 were to be turned in to the government – people were compensated for their gold at $20.67 per ounce.  The right to own gold was not restored until 1974. 
On Jan. 15, 1934, Roosevelt issued a statement to Congress arguing "the practice of transferring gold from one individual to another or from the government to an individual within a nation is not only unnecessary, but is in every way undesirable," and recommended that the US government should take permanent legal "title to all supplies of American-owned monetary gold." Two weeks later on Jan. 30, Congress passed the Gold Reserve Act, which legally nationalized all US gold. The next day, Roosevelt devalued the dollar from $20.67 per ounce to $35 per ounce - a price it would remain at until 1971. This devaluation was undertaken to "stabilize domestic prices."  The government's gold reserves would now serve only as backing for its currency and for use in international transactions. US citizens would no longer be able to exchange their paper money for gold. One year later, the economy began to turn – the 5.1% annual deflation in 1933 became a 3.1% annual inflation by the end of 1934.  In 1936 the US Bullion depository at Fort Knox was completed to store the government's gold reserves and by 1941 it held 649.6 million ounces of gold.  On Dec. 8, 1941, the United States entered WWII.
At the conclusion of WWII in 1944 President Roosevelt presided over the creation of a new international monetary system – the Bretton Woods system. Under the system, all countries agreed to keep the value of their currency stable – to not inflate or deflate their currency by more than 1%. The dollar became the mechanism by which this was made possible as countries bought and sold dollars to keep their own currencies stable.  The United States pledged to back the dollar with gold – any foreign holder of dollars could exchange them for gold at $35 per ounce.  Throughout the 1950s, US dollars flooded the world  in the form of loans and as payment for goods imported into the US.  By the late 1960s a large fiscal deficit had developed as the United States increased its printing of dollars to fund expenditures on the Vietnam War and President Johnson's "Great Society" social programs.  Foreign holders of the dollar began to fear it had become overvalued and started exchanging their dollars for gold. This fear was further stoked in 1968 when the requirement to hold gold reserves against Federal Reserve notes was repealed.  Between 1949 and 1968, the US gold reserve was reduced from 701 million ounces to 296 million ounces. 
On Aug. 6, 1971, a congressional report concluded that the dollar was overvalued, and over the next week nearly $4 billion in gold and other assets left the United States as foreign nations redeemed their dollars.  The remaining US gold reserves at Fort Knox were reduced to the point that they would only cover about 1/3 of the dollars still held by foreign nations.  On Aug. 15, 1971, to prevent further draining of the United States’ gold reserves, President Nixon announced that dollars held by foreign countries would no longer be exchangeable for gold.  The international gold exchange standard that had existed since 1933 was over. The United States dollar was no longer backed by gold in any way and the dollar became a fiat currency supported only by the "full faith and credit" of the United States government.
When the United States left the gold standard in 1971 inflation was at 4.4%, but over the decade it began to rise. In 1974, 1979, 1980, and 1981 the United States saw double digit inflation.  During this same decade the amount of US currency in circulation (M1) rose from $52.9 billion in 1971 to $124.6 billion by 1981.  When Republican Ronald Reagan was elected in 1980, monetary conservatives saw an opening for policy change and began advocating for a return to the gold standard, which they saw as a tool to fight the currency expansion and inflation.  On June 22, 1981, a 16-member US Gold Commission was appointed to study the issue, and on Mar. 31, 1982 they recommended against "the issue of Treasury gold-backed notes or bonds," and found that "restoring a gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation." However, this finding was not unanimous. A minority of the commission concluded that "the only way price stability can be restored… is by making the dollar (and other national currencies) convertible into gold. Linking money to gold domestically and internationally will solve the problem of inflation, high interest rates, and budged deficits."  One of the members of this minority was US Representative Ron Paul (R-TX). Although returning to a gold standard was rejected, the commission did recommend that the US Treasury begin production of gold bullion coins for sale to the public. On Dec. 17, 1985, President Reagan signed the Gold Bullion Act of 1985 authorizing, for the first time in 50 years, the production of US gold coins minted by the Treasury. 
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Image of gold bars stacked in the Federal Reserve gold vault in New York City. Source: Federal Reserve Bank of New York, "Gold Vault," newyorkfed.org (accessed Dec. 31, 2012)
During the 2012 presidential race a debate about the gold standard resurfaced, with Republican candidate Ron Paul making it a major focus of his campaign. The 2012 Republican Platform called for a new commission, similar to the Gold Commission of 1982, to study the role of gold and "investigate possible ways to set a fixed value for the dollar."  In response to the renewed debate, Federal Reserve Chairman Ben Bernanke addressed the issue of a gold standard in a 2012 lecture, arguing that a gold standard "would not be feasible for both practical reasons and policy reasons." 
Although there is no official link between the dollar and gold, the United States continues to hold 261.5 million troy ounces of gold (as of Dec. 2012). Of this total about 95% (248 million troy ounces) is held by the US Mint. The remaining 5% (13.4 million troy ounces) is held by the Federal Reserve. The US Mint holds about 2.8 million ounces of its gold as "working stock" to be used in the production of official US gold coins for sale to the public as numismatic collectibles, and for investment purposes. 
As of 2012, the total world-wide supply of gold stands at about 170,000 metric tons or 5.5 billion troy ounces. Melted across a 100-yard NFL football field, it would rise 5.4 feet.  According to the World Gold Council, the majority of world gold is used for jewelry - about 59%. Investors hold about 19% of total world gold, and government sector reserves comprise about 17%. The remaining gold is used for industrial and technological purposes.  Of the government sector reserves, the United States holds the largest with 261.5 million troy ounces, followed by Germany (109.2 million troy ounces), Italy (78.8 million troy ounces), France (78.3 million troy ounces), and China (33.9 million troy ounces).