An interesting little item concerning “the” gold standard came up recently in Locke-land. One of our very, very astute Locke-ers objected to an encyclopedia entry that defined the gold standard as a government-established relationship between a dollar and quantity (weight) of commodity gold. Good call.
There are gold standards and there are gold standards. One definition is a government established legal exchange rate between a dollar and a specific weight of gold. Frequently this definition applied to gold in minted, or coined, form. Minted gold is easy to measure, has a regular shape and size, and is simple to assay for purity, etc.
Since gold has lots of uses besides money, the exchange rate over time between non-minted commodity gold and other items, say, automobiles, might not remain at the official exchange rate set by authorities. That creates a problem with the minted gold coinage—gold hoarding and the disappearance of gold coins are the most serious problems—and a topic for another discussion.
An entirely different gold standard can exist if paper money, which is inherently worthless, simply functions as a receipt for the thing of value—gold. Presumably, you stash your gold with someone for safekeeping, they give you a claim check, and away you go. You can even exchange away the receipt if you want to, because it is “as good as gold.” Once you take your gold ounces out of safekeeping, you can decide whether you would rather hold on to the receipts for the gold, or the gold itself. It’s pretty much a matter of convenience and safety. The number of receipts you need to exchange away, to make a purchase, will vary with the value of gold out in the marketplace. The receipts themselves have no set exchange value.
To see how this flexible system might work, consider an example in which garaged cars, and claim tickets to garaged cars, are used to make purchases instead of gold, and paper receipts for gold. Suppose you want to buy a new car, entirely by trading in used cars for your purchase. You have one car garaged in a car park in Raleigh, and you also have the claim ticket for the car. When you arrive at the Nissan dealer, they will not want to know how many claim tickets to cars you have (initially), they will want to know the market value of the car represented by the ticket you are offering.
If that car is a junker, with high mileage and poor maintenance, valued at $1,500, you are going to need to trade in more than one claim ticket for your new $22,000 Altima. Once you calculate the market value of all of the garaged cars you own (that you can possibly trade in for the new wheels), you will know how many receipts it will “cost” you. The number of receipts, in fact, is irrelevant. You are really calculating price by how many used cars the new car is worth.
A flexible gold/dollar exchange rate works like this car purchase scenario, only simpler. Because gold doesn’t have a widely varying market price for a given weight and fineness, information costs about the market value of a gold receipt are far lower than information costs about the value of a collection of used cars. It will be easier, in other words, to figure out how many receipts you need to hand over.
Does it matter whether the gold standard exists under a fixed vs. a flexible exchange rate per dollar? Yes, though you’ll get your car either way. Flexible rates just reduce the “noise” in market prices, and allow markets to work more smoothly.