What Has Government Done to Our Money? The Monetary Unit

What Has Government Done to Our Money?

Now that we have seen how money emerged, and what it does, we may ask: how is the money-commodity used? Specifically, what is the stock, or supply, of money in society, and how is it exchanged?

In the first place, most tangible physical goods are traded in terms of weight. Weight is the distinctive unit of a tangible commodity, and so trading takes place in terms of units like tons, pounds, ounces, grains, grams, etc. [3] Gold is no exception. Gold, like other commodities, will be traded in units of weight. [4]

It is obvious that the size of the common unit chosen in trading makes no difference to the economist. One country, on the metric system, may prefer to figure in grams; England or America may prefer to reckon in grains or ounces. All units of weight are convertible into each other; one pound equals sixteen ounces; one ounce equals 437.5 grains or 28.35 grams, etc.

Assuming gold is chosen as the money, the size of the gold-unit used in reckoning is immaterial to us. Jones may sell a coat for one gold ounce in America, or for 28.35 grams in France; both prices are identical.

All this might seem like laboring the obvious, except that a great deal of misery in the world would have been avoided if people had fully realized these simple truths. Nearly everyone, for example, thinks of money as abstract units for something or other, each cleaving uniquely to a certain country. Even when countries were on the "gold standard," people thought in similar terms. American money was "dollars," French was "francs," German "marks," etc. All these were admittedly tied to gold, but all were considered sovereign and independent, and hence it was easy for countries to "go off the gold standard." Yet all of these names were simply names for units of weight of gold or silver.

The British "pound sterling" originally signified a pound weight of silver. And what of the dollar? The dollar began as the generally applied name of an ounce weight of silver coined by a Bohemian Count named Schlick, in the sixteenth century. The Count of Schlick lived in Joachim's Valley or Jaochimsthal. The Count's coins earned a great reputation for their uniformity and fineness, and they were widely called "Joachim's thalers," or, finally, "thaler." The name "dollar" eventually emerged from "thaler."

On the free market, then, the various names that units may have are simply definitions of units of weight. When we were "on the gold standard" before 1933, people liked to say that the "price of gold" was "fixed at twenty dollars per ounce of gold." But this was a dangerously misleading way of looking at our money. Actually, "the dollar" was defined as the name for (approximately) 1/20 of an ounce of gold. It was therefore misleading to talk about "exchange rates" of one country's currency for another. The "pound sterling" did not really "exchange" for five "dollars." [5] The dollar was defined as 1/20 of a gold ounce, and the pound sterling was, at that time, defined as the name for 1/4 of a gold ounce, simply traded for 5/20 of a gold ounce. Clearly, such exchanges, and such a welter of names, were confusing and misleading. How they arose is shown below in the chapter on government meddling with money. In a purely free market, gold would simply be exchanged directly as "grams," grains, or ounces, and such confusing names as dollars, franc, etc., would be superfluous. Therefore, in this section, we will treat money as exchanging directly in terms of ounces or grams.

Clearly, the free market will choose as the common unit whatever size of the money-commodity is most convenient. If platinum were the money, it would likely be traded in terms of fractions of an ounce; if iron were used, it would be reckoned in pounds or tons. Clearly, the size makes no difference to the economist.

[3] Even those goods nominally exchanging in terms of volume (bale, bushel, etc.) tacitly assume a standard weight per unit volume.

[4] One of the cardinal virtues of gold as money is its homogeneity--unlike many other commodities, it has no differences in quality. An ounce of pure gold equals any other ounce of pure gold the world over.

[5] Actually, the pound sterling exchanged for $4.87, but we are using $5 for greater convenience of calculation.