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4. The Money Unit

We referred to prices without explaining what a price really is. A price is simply the ratio of the two

quantifies 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.2

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 [p. 10] fixing the price 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


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 guar dians 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 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 fur, the currency of

the mythical kingdom [p. 11] 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 fur from 20 to 16 grams. He then pockets the extra 20% 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%. The money supply in rurs,

therefore, has gone up by 20%, 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.6

The pound sterling has diminished from 16 ounces of silver to its present fractional state because of

repeated debasements, or changes in definition, by the kings of England. Similarly, rapid and extensive

debasement was a striking feature of the Middle Ages, in almost every country in Europe. Thus, in 1200, the

French livre tournois was defined as 98 grams of fine silver; by 1600 it equaled only 11 grams.

A particularly striking case is the dinar, the coin of the Saracens in Spain. The dinar, when first

coined at the end of the seventh century, consisted of 65 gold grains. The Saracens, notably sound in monetary

matters, kept the dinars weight relatively constant, and as late as the middle of the twelfth century, it still

equalled 60 grains. At that point, the Christian [p. 12] kings conquered Spain, and by the early thirteenth

century, the dinar (now called maravedi) had been reduced to 14 grains of gold. Soon the gold coin was too lightweight to circulate, and it was converted into a silver coin weighing 26 grains of silver. But this, too, was

debased further, and by the mid-fifteenth century, the maravedi consisted of only 11/2 silver grains, and was

again too small to circulate.7

Where is the total money supply—that crucial concept—in all this? First, before debasement, when the

regional or national currency unit simply stands for a certain unit of weight of gold, the total money supply is the

aggregate of all the monetary gold in existence in that society, that is, all the gold ready to be used in exchange.

In practice, this means the total stock of gold coin and gold bullion available. Since all property and therefore

all money is owned by someone, this means that the total money stock in the society at any given time is the

aggregate, the sum total, of all existing cash balances, or money stock, owned by each individual or group.

Thus, if there is a village of 10 people, A, B, C, etc., the total money stock in the village will equal the sum of

all cash balances held by each of the ten citizens. If we wish to put this in mathematical terms, we can say that

where M is the total stock or supply of money in any given area or in society as a whole, m is the individual

stock or cash balance owned by each individual, and E means the sum or aggregate of each of the Ms.

After debasement, since the money unit is the name (dinar) rather than the actual weight (specific

number of gold grams], the number of dinars or pounds or maravedis will increase, and thus increase the

supply of money. M will be the sum of the individual dinars held by each person, and will increase by the

extent of the debasement. As we will see later, this increased money supply will tend to raise prices throughout

the economy. [p. 13] [p. 14] [p. 15]