In the 19th and early 20th centuries gold played a key role in the international monetary system, being used to back currencies.
The international value of each nation's currency was determined by its fixed relationship to gold, with the precious metal being used to settle international accounts. The gold standard maintained fixed exchange rates that reduced the risk of trading with other countries. Imbalances in international trade were settled by physical transfers of gold bullion.
A country with a deficit (more imports than exports) would deplete its gold reserves and would thus reduce its money supply reducing demand for imports and boosting exports through lower prices. It is through this mechanism that the trade deficit adjusted. A country with high inflation lost gold as holders converted paper into gold decreasing the amount of money available reducing the inflationary pressure.
The system operated more or less continuously although from time to time countries went off the gold standard. Britain suspended the convertibility of pounds to gold in 1914 to fund military operations during World War I. A reluctant Winston Churchill, who was castigated by the great economist John Maynard Keynes, returned Britain to the gold standard in 1925 but abandoned it in 1931.
Monetary gold is in 400 troy ounce bars – each bar weighs about 28 pounds (about 11 kilograms). At the current prices, each bar is worth around $700000. Each bar bears an assay mark recording quantity and quality of the gold and also the mint at which it was produced.
Gold bullion is stored in ultra secure vaults such as Fort Knox and the Bank of England in sealed lockers. Each locker belongs to an individual owner, perhaps, a central bank (the Bank of England, the US Federal Reserve, the Bundesbank) or private banks (NM Rothschilds, Republic Bank of New York).
At an appointed time, burly men dressed in drab grey uniforms move bars of gold using a combination of pallets and conveyor belts from one numbered locker to another in settlement of purchases and sales of individual sellers and buyers. This movement of gold bullion over the short distance had once signalled major changes in the fortunes and wealth of countries and kings.
In 1998, gold sceptic Warren Buffett pointed to the absurdity: "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."