A price is simply the ratio of the two quantities exchanged in any
transaction. It should be no surprise that every monetary unit we
are now familiar with—the dollar, pound, mark, franc, et al.—
began on the market simply as names for different units of weight
of gold or silver. Thus the “pound sterling” in Britain, was exactly
that—one pound of silver.
The “dollar” originated as the name generally applied to a
one-ounce silver coin minted by a Bohemian count named
Schlick, in the sixteenth century. Count Schlick lived in Joachimsthal
(Joachim’s Valley). His coins, which enjoyed a great reputation
for uniformity and fineness, were called Joachimsthalers and
finally, just thalers. The word dollar emerged from the pronunciation
of thaler.
Since gold or silver exchanges by weight, the various national
currency units, all defined as particular weights of a precious
metal, will be automatically fixed in terms of each other. Thus,
suppose that the dollar is defined as 1/20 of a gold ounce (as it
was in the nineteenth century in the United States), while the
pound sterling is defined as 1/4 of a gold ounce, and the French
franc is established at 1/100 of a gold ounce.3 But in that case,
the exchange rates between the various currencies are automatically
fixed by their respective quantities of gold. If a dollar is 1/20
of a gold ounce, and the pound is 1/4 of a gold ounce, then the
pound will automatically exchange for 5 dollars. And, in our
example, the pound will exchange for 25 francs and the dollar for
5 francs. The definitions of weight automatically set the exchange
rates between them.
Free market gold standard advocates have often been taunted
with the charge: “You are against the government fixing the price
Money: Its Importance and Origins 9
proudly equal to one pound of silver, now equals only 1/8 of a silver ounce.
How this decline and fall happened is explained in the text.
3The proportions are changed slightly from their nineteenth century
definitions to illustrate the point more clearly. The “dollar” had moved
from Bohemia to Spain and from there to North America. After the Revolutionary
War, the new United States changed its currency from the British
pound sterling to the Spanish-derived dollar. From this point on, we assume
gold as the only monetary metal, and omit silver, for purposes of simplification.
In fact, silver was a complicating force in all monetary discussions in
the nineteenth century. In a free market, gold and silver each would be free
to become money and would float freely in relation to each other (“parallel
standards”). Unfortunately, governments invariably tried to force a fixed
exchange rate between the two metals, a price control that always leads to
unwelcome and even disastrous results (“bimetallism”).
of goods and services; why then do you make an exception for
gold? Why do you call for the government fixing the price of gold
and setting the exchange rates between the various currencies?”
The answer to this common complaint is that the question
assumes the dollar to be an independent entity, a thing or commodity
which should be allowed to fluctuate freely in relation to
gold. But the rebuttal of the pro-gold forces points out that the
dollar is not an independent entity, that it was originally simply a
name for a certain weight of gold; the dollar, as well as the other
currencies, is a unit of weight. But in that case, the pound, franc,
dollar, and so on, are not exchanging as independent entities;
they, too, are simply relative weights of gold. If 1/4 ounce of gold
exchanges for 1/20 ounce of gold, how else would we expect
them to trade than at 1:5?4
If the monetary unit is simply a unit of weight, then government’s
role in the area of money could well be confined to a simple
Bureau of Weights and Measures, certifying this as well as
other units of weight, length, or mass.5 The problem is that
governments have systematically betrayed their trust as guardians
of the precisely defined weight of the money commodity.
If government sets itself up as the guardian of the international
meter or the standard yard or pound, there is no economic
incentive for it to betray its trust and change the definition. For
the Bureau of Standards to announce suddenly that 1 pound is
10 The Mystery of Banking
4In older periods, foreign coins of gold and silver often circulated freely
within a country, and there is, indeed, no economic reason why they should
not do so. In the United States, as late as 1857, few bothered going to the
U.S. Mint to obtain coins; the coins in general use were Spanish, English,
and Austrian gold and silver pieces. Finally, Congress, perturbed at this slap
to its sovereignty, outlawed the use of foreign coins within the U.S., forcing
all foreign coinholders to go to the U.S. Mint and obtain American gold
coins.
5Thus, Frederick Barnard’s late nineteenth-century book on weights
and measures has a discussion of coinage and the international monetary
system in the appendix. Frederick A.P. Barnard, The Metric System of
Weights and Measures, rev. ed. (New York: Columbia College, 1872).
now equal to 14 instead of 16 ounces would make no sense whatever.
There is, however, all too much of an economic incentive
for governments to change, especially to lighten, the definition of
the currency unit; say, to change the definition of the pound sterling
from 16 to 14 ounces of silver. This profitable process of the
government’s repeatedly lightening the number of ounces or
grams in the same monetary unit is called debasement.
How debasement profits the State can be seen from a hypothetical
case: Say the rur, the currency of the mythical kingdom
of Ruritania, is worth 20 grams of gold. A new king now ascends
the throne, and, being chronically short of money, decides to take
the debasement route to the acquisition of wealth. He announces
a mammoth call-in of all the old gold coins of the realm, each
now dirty with wear and with the picture of the previous king
stamped on its face. In return he will supply brand new coins with
his face stamped on them, and will return the same number of
rurs paid in. Someone presenting 100 rurs in old coins will receive
100 rurs in the new.
Seemingly a bargain! Except for a slight hitch: During the
course of this recoinage, the king changes the definition of the rur
from 20 to 16 grams. He then pockets the extra 20 percent of
gold, minting the gold for his own use and pouring the coins into
circulation for his own expenses. In short, the number of grams
of gold in the society remains the same, but since people are now
accustomed to use the name rather than the weight in their money
accounts and prices, the number of rurs will have increased by 20
percent. The money supply in rurs, therefore, has gone up by 20
percent, and, as we shall see later on, this will drive up prices in
the economy in terms of rurs. Debasement, then, is the arbitrary
redefining and lightening of the currency so as to add to the coffers
of the State.
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