Mr. Lewis asks, “How is the paper bills’ value managed?” He prefaces his question with “some quantity of gold in a vault somewhere.” The answer to his question is obvious. Holders of paper money redeem their paper money for the gold coin. Holders of the gold who issued the paper money convert all paper money to gold coin on demand.
Under the gold standard, the government does not fix the price of gold. It defines the monetary unit, such as the dollar, as a specific weight of gold. That is, the dollar is a specific weight of gold. For example, the dollar is defined as 1/20 of an ounce of gold or 24 grains of gold. The dollar is 24 grains of gold. It is a unit of weight like the pound. It is just limited to money. By declaring the dollar to be 24 grains of gold, the government has no more fixed price of gold than it has fixed the price of a pound by declaring it to be 7000 grains. The dollar is a unit of weight like the pound or gram. It is just limited to gold. The dollar is fixed in terms of gold; gold is not fixed in the terms of the dollar.
Many people claim that sliver was demonetized in 1873 when Congress enacted the Coinage Act of 1873. This claim is not true. Congress did not demonetize silver. It ended the silver standard and took the first step in demonetizing the dollar.
With the Bland-Allison Act, in 1878, Congress authorized minting silver dollars. The law ordered the Secretary of the Treasury to buy silver bullion and coin it; it did not open the mint to the free coinage of silver. Silver dollars were declared standard dollars and legal tender and were not redeemable in gold. Also, for the first time, this law authorized the Secretary of the Treasury to issue silver certificates. The value silver in the standard silver dollar fluctuated in terms of gold between $0.89 (1878) and $0.46 (1897-1899). This law managed to confuse the definition of the dollar. The Sherman Act replaced it.
A major difference between the supporters of the gold standard and its opponents is how they view money. Supporters generally think in terms of the quality of money. How much a unit of money will buy is more important than the number of monetary units. Conversely, opponents think in terms of the quantity of money. The number of monetary units is more important than how much a unit of money will buy. A person who thinks in terms of quantity would prefer ten million Zimbabwe dollars (July 2008 vintage) to one euro. A person who thinks in terms of the quality of money would prefer one euro because it had more purchasing power.
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