A common misunderstanding about a commodity standard is that the government fixes the price of the monetary commodity. Many people believe that under the gold standard, the government fixes the price of gold. For example, if an ounce of gold exchanges for $20, the government has fixed the price of gold at $20 per ounce. No one would sell gold bullion for less than $20 per ounce because he could take the bullion to the mint and get it minted into coins at $20 per ounce. Furthermore, no one would pay more than $20 per ounce for bullion because he can melt coins to obtain bullion.
Under the gold standard, the government does not fix the price of gold. It defines the monetary unit, such as the dollar, as a specific weight of gold. That is, the dollar is a specific weight of gold. For example, the dollar is defined as 1/20 of an ounce of gold or 24 grains of gold. The dollar is 24 grains of gold. It is a unit of weight like the pound. It is just limited to money. By declaring the dollar to be 24 grains of gold, the government has no more fixed price of gold than it has fixed the price of a pound by declaring it to be 7000 grains. The dollar is a unit of weight like the pound or gram. It is just limited to gold. The dollar is fixed in terms of gold; gold is not fixed in the terms of the dollar.
Another way of stating this point is in terms of the independent variable and the dependent variable. People who claim that the price of gold is fixed under the gold standard are claiming that an abstract unit of value, e.g., the dollar, is the independent variable. A concrete weight of gold is the dependent variable. Thus, an abstraction fixes the value of a concrete weight of gold.
Conversely, people who claim that under the gold standard the price of gold is not fixed claim that the value of gold is the independent variable. The monetary unit is the dependent variable as it is a fixed weight of gold. A concrete weight of gold fixes the value of the monetary unit.
“The metre is the length of the path travelled by light in vacuum during a time interval of 1?299 792 458 of a second.” If they are consistent, people who claim that the government fixes the price of gold instead of gold defining the value of the monetary unit, must argue that the government fixes the distant that light travels in a fraction of a second instead of defining that distance as the length of a metre. How absurd. The government defines the abstraction, the “metre,” in terms of the tangible distant that light travels in a fraction of a second. It does not define the tangible distant that light travels in a fraction of a second in terms of the abstraction. Likewise, with gold, government defines the abstract monetary unit in terms of a tangible weight of gold.
This discussion may seem to be an unimportant discourse about semantics. It is not. The distinction is highly important. Is gold to be fixed in dollars, i.e., gold is priced in dollars? That is, the government declares that the dollar is an abstraction, and it has arbitrarily fixed the price of gold. This notion leads quickly down the road to paper fiat money. On the other hand, is the dollar to be fixed in gold, i.e., the dollar is a unit of weight of gold? The government declares the dollar to be a tangible and defines it as a measurable amount of gold. This notion is the essence of the gold standard; the monetary unit is a weight of gold.
• “Metre,” Wikipedia, http://en.wikipedia.org/wiki/Metre, July 10, 2010.