[THOMAS.BEHNKE]

Dr. Herbener,

I don’t understand why Rothbard (and I presume most Austrians) believe that a fixed value should be placed on gold to the dollar. Shouldn’t the market determine the value of gold? Suppose the supply of gold went up, causing its value to go down. In this case, wouldn’t the dollar be overvalued, causing a slight decline in purchasing power?

Thanks for your help,
Tommy

[jmherbener]

Rothbard wants the dollar to be defined as a weight of gold. Under the Coinage Act of 1792, the dollar was defined as 247 4/8 grains of pure gold. In other words, the Treasury minted $10 gold coins each with 247 4/8 grains of pure gold. The dollar currency was a redemption claim for gold such that a person could take a $10 bill and redeem it for a $10 gold coin. Gold coins were money and currency was a redemption claim for money.

http://www.constitution.org/uslaw/coinage1792.txt

Defining the dollar was part of Congress’s power under the Constitution in Article 1, Section 8, Clause 5, which reads, “[Congress shall have the power] to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Just as Congress might adopt the mile as a standard of measure and define a mile as 5,280 feet, it might adopt gold as money and use the dollar as a currency name defined as $10 = 247 4/8 grains of pure gold.

http://constitutionus.com/

Under this system, the market would determine the purchasing power of gold. But the name “dollar” is fixed by definition.

[THOMAS.BEHNKE]

Right, I understand what you’re saying. But my question is why should a gold coin have a fixed value attached to it? Shouldn’t the exchange rate be determined exclusively by weight and the value in that specific time frame since the value can fluctuate?

[jmherbener]

The exchange ratio of gold to other goods is not fixed, but fluctuates with changes in people’s preferences with respect to gold coins relative to other goods. The dollar is just a name for a weight of gold, so the dollar must have a fixed definition in terms of gold. In a pure gold standard, money is gold coins. As Rothbard points out, we can dispense with the name “dollar” altogether and just name the gold coins by their weight. In other words, we could call a gold coin “1/20th of an ounce.” Or we could call the gold coin of 1/20th of an ounce of gold some made up name like “Hayek.” Then two Hayeks would refer to 1/10th of an ounce of gold or two 1/20th of an ounce coins. Neither the Hayek nor the dollar is a fixed “value” for the coin. Instead it refers to the fixed weight of gold that the coin contains.

[THOMAS.BEHNKE]

Okay, that makes a lot of sense. But didn’t this pose a small problem when even the 100 percent fractional reserve banks sprouted up? Gold could fluctuate in value, but didn’t the denominated bank notes that they could be redeemed with stay at a fixed value? So if the price of gold went up or down, the value of the bank notes stayed the same, causing either deflation or inflation?

EDIT: I think I understand what you’re saying now. The bank notes would be written out for a certain number of gold ounces, and not a fixed DOLLAR amount. Thank you for that clarification.

[jmherbener]

Bank notes were simply claims to a fixed dollar equivalent of gold. For example, a $10 bank note could be redeem at the issuing bank for a $10 gold coin. So the bank note had the same exchange value as the equivalent gold coin.

[THOMAS.BEHNKE]

But lets say that I traded in a $10 gold coin for a $10 bank note. A month after I did so, the price of gold went from $10 an ounce to $9 an ounce. Didn’t I profit at the expense of the bank?

Conversely, if I traded in a $10 gold coin for a $10 bank note, and months later the price of golf increased from $10 an ounce to $11 an ounce, didn’t the bank profit off of the exchange?

This is why I’m confused. I can understand the point in all of this if gold coins did not have a monetary value (ex, $10) affixed to them and everything was based off of weight. Then, bank notes would simply be written out for a certain amount of gold ounces. Fluctuations in the price of gold would not cause anyone to lose/profit off of the deal.

What am I not understanding?

[jmherbener]

Under a gold coin standard, the name dollar is defined as a weight of gold. So there is no dollar price of gold. There are only dollar prices of goods and services. Once defined, the dollar equivalent to gold does not change. If ten dollars is a defined as equivalent to a half ounce of gold, then a half ounce of gold cannot fall from $10 to $9. A half ounce of gold can fall in purchasing power relative to goods, but not in a dollar defined name.

If one foot is defined as equivalent to 12 inches, then the “value” of the foot cannot fall to ten inches. Feet and inches are just two different names for an equivalent length. A person’s height could change from 5′ to 6′ but that would still be equivalent to a change from 60″ to 72″. So the price of a month’s rent could change from a half ounce of gold to an ounce of gold, but that would be equivalent to a change from $10 to $20. Gold ounces and dollars are merely two different ways of referring to the same thing.

Under a gold coin standard, a bank note is not traded for a gold coin. A bank note is redeemed by the issuing bank for the equivalent amount of gold. This is what makes bank notes a substitute for gold coins. Merchant accept either a half ounce gold coin or a $10 bank note because they know that the bank that issued the $10 bank note will redeem it for a half ounce gold coin. So gold coins and bank notes both trade for goods and services, but not for each other. The legal way of seeing the relationship between bank notes and gold coins is that bank notes are titles of ownership to gold coins. A $10 bank note issued by the First National Bank is a legal title of ownership to a half ounce gold coin. The FNB stamps this fact on the bank note. For example a $10 bank note might have the words, “pay to the bearer of this note, $10 in gold” stamped on it. So, the value of a bank note in terms of gold is fixed contractually by the issuing bank. The bank does this to create general acceptance of its bank notes as a substitute medium of exchange for gold coins.

[THOMAS.BEHNKE]

Got it! Thank you so much for taking the team to clear that up for me.

[THOMAS.BEHNKE]

Got it! Thank you so much for taking the team to clear that up for me.

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