I am trying to come up with a currency 100% backed by gold and silver but am having problems. For example- You buy $1 million in gold then print $1 million-worth of your notes- all redeemable for gold. If the gold market goes up, naturally you need to buy more. If the gold market goes down, you need to buy twice as much as the value of gold is taking a hit and you want to keep your notes worthy. I have come to the conclusion that unless your mintage is the gold itself, there is no way to run a PM-backed currency without having to adjust for the market constantly!
What the gold standard does is remove the ability of governments to fool with monetary policy. Unfortunately, the gold (or any PM) standard also presents its own problems. It limits economic growth to the expansion of the gold supply. The Great Depression may have been intitated by France messing with exchange rates and cornering much of the gold supply, and was overcome pretty much as each country left the gold standard. http://www.dartmouth.edu/~dirwin/Did France Cause the Great Depression.pdf Monetary policy, now that the Fed held interest rates artifically low, badly overheats the economy into a crash. Low interest grew the government two ways. The boom increased income, increased taxes. The low interest rates (and an "interest only" loan) allowed government borrowing at an unpresidented level. The latter assures the Fed can't increase interest rates.