For most of the world's history for thousands of years, gold was used as the medium of exchange for money. The world gradually moved off the gold standard in the 20th century.
What were the factors that caused the Gold Standard to be less workable in the 20th century than historically?
I'll take a stab at this, although it really does deserve an economics stack exchange
Short reason: Population growth relative to gold supply.
Long reason:
A gold standard is another way of saying that your money supply is inelastic. Each bank note is linked to a fixed amount of gold and in theory should allow you buy that amount of gold. As gold is produced by supernova nucleosynthesis, the gold is "created" only in so far as it is mined from crust deposits and the rate of newly mined gold isn't nearly enough for the level of global economic activity.
New gold is about 4% of what's needed each year (if ~135 billion USD of new gold/year and 3.9% of ~85 trillion USD of gross world product *); and most of this gold doesn't circulate as it's required to absorb commodity shocks such as oil and secure the currencies of many central banks.
As the world population grows, the money needed to reflect transactional IOUs between people increases. Eventually the gold backing the bank notes is so small and abstract as to be effectively irrelevant (no gold in your pocket), except as a concept of redeemability that still lingers in the popular imagination today.
The break away from the gold standard (i.e. that you could in theory buy a fixed amount of gold invariant of market demand for each bank note) occurred because of the need to rapidly expand war-time debt. Which is to say, compressed and time-shifted future tax revenue ("debt") resulting in a massive spike in money supply to reflect the real world massive spike in material effort involved in war activities (i.e. people do more in a total war, at least as so far trapped liquidity is concerned).
After each world war, the money supply couldn't be contracted to a fixed ratio of gold (each note's supposed "real" value in gold) without causing deadly deflation**. The Bretton Woods agreement was not actually a gold standard but rather a lip-service to one, as only central banks had access to a fixed gold exchange (i.e. not the higher volatile market rate).
Expensive proxy wars and a rising global standard of living eventually grew the money supply beyond the ability of even central banks to meaningfully exchange gold-backed promissory notes. Hence the final vestiges were broken in the "Nixon Shock" to order to allow free floating fiat currency. The shock itself is somewhat overstated considering that alternative would have required a complete re-evaluation of the role of money and a move towards a post-growth global economy which we were not and are probably still not ready for.
The core long term driver of economic growth (money supply) is population growth; as productivity growth is trapped in an upward siphon and hence barely drives the economy relative to population growth***.
Even longer reason:
Read http://en.wikipedia.org/wiki/Gold_standard
* Despite the importance of money supply statistics, no one actually has anything more than a rough estimate of global M0 or MZM. Which should scare the shit out you.
* * Inflation makes a gold standard seem sexy, but deflation is far worse in our current economic paradigm of resource distribution; and at least hyperinflation is politically self limiting.
* * * Speculation and debt can also expand the money supply, but they eventually have to "latch onto" someone's actual production of work if they are to have any meaning in the first place. Hence their expansion of the money supply is closely related to the available global labour pool as influenced by population growth.
Historically, the supply of gold has grown at the rate of 2% a year (through mining, new discoveries, etc.). That is too low a rate of growth to allow the world to grow at its desired pace of 3% or higher, and still maintain the price of goods at stable, to rising. (If gold, your "money supply" is growing at 2% a year, and goods at 3%, the price of goods would need to fall 1% a year on average, to compensate. This is known as "deflation," and scares most bankers and economists.) Historically, economic growth had been held hostage to new gold discoveries; e.g. with boom and bust cycles for countries like Spain.
During the 20th century, economic thinkers such as John Maynard Keynes and Milton Friedman showed that without the gold standard, it was possible to expand the money supply at a 3%-4% annual rate, in line with, and thereby supporting, global growth. This knowledge caused the United States to "overexpand" in the 1960s to finance the Vietnam War. By 1971, the U.S. could no longer keep its pledge, made in 1944 at Bretton Woods, to redeem its dollars for gold. So the U.S. let the dollar "float" against gold (find a "natural" price different from the historical $35 an ounce), thereby going off the gold standard. With the notable exception of Japan and Germany most developed world countries such as Britain and Italy were in similar straits, and went off the gold standard, along with the U.S.
The gold standard was a simple, straightforward way of managing the world's money supply. Like most simple, straightforward ideas, it is utterly inadquate when confronted with a complicated real world problem.
The best answer to the question is The Atlantic summary of the problem in two graphs . Although the proponents of the gold standard praise it as a way of averting inflation, the gold standard actually condemns the economies in question to violent business cycles that result in higher inflation. As the economist article suggests, the discussion should stop here.
But there are other problems with the gold standard.
The gold standard outsources monetary management to a countries that are lucky enough to have gold. The money supply grows in response to arbitrary discoveries of gold, and those countries get the benefit of expanding the money supply without any obligation to expand production or value. This was particularly silly during the era when the countries most likely to discover new gold were Russia and South Africa - countries that were founded on policies that were anathema to most of the world (Communism and apartheid). Take for example the unlikely to be repeated but very real example of the Spanish economic collapse; Spains possessions in the new world resulted in Spain possessing an unbelievalble amount of the world's specie. Spain managed to drive up inflation all over the world, but didn't invest the resulting wealth in any way that deepened capital. The result was a complete catastrophe for Spain, and a lot of pain for the rest of the world.
Commentators have made some very good points that I'd like to answer
It is mistake to see gold as some kind of bygone historical artifact or "barbarous relic" of the past as Keynes put it.
Throughout history states have variously adopted more public or less public standards of gold depending on political factors.
For example, early in the Roman Republic the aureus was an important standard of commerce, but later in the empire, under governments like that of Diocletian, gold was completely removed and replaced with paper credits and debased coinage made out of copper and other base metals.
In general, the more comprehensive and overarching the government, the more hidden the gold is.
Just because the use of gold is hidden, does not mean it is not used. Gold is always the standard of wealth, no matter how much paper and copper you use. Just because you personally do not see that use, does not mean it is not the standard. Below JFK airport in New York and below the Zurich airport are gigantic vaults filled with billions in gold that is moved back and forth to settle accounts, no different than when the gold ships used to sail back in 1900, only now the gold is moved in 747 aircraft instead of clipper ships. What has changed is the visibility of this trade, not its importance.
