Devaluing the Dollar Relative to Gold

There is regularly talk about the Fed (or Treasury) devaluing the U.S. dollar, but how do you devalue something that doesn't have a fixed measurement? Specifically, what would the Fed/Treasury devalue the dollar against and how would they go about it? In a recent interview with Eric King, Jim Rickards posits that the Fed could bring about a general dollar devaluation by using its open market operations to bid up the gold price, the idea being that devaluing the dollar against gold would scare people out of dollars and thus cause a reduction in the dollar's purchasing power. Would this work?

Well, if the Fed started bidding up the gold price it would definitely scare a lot of people, but by itself it couldn't bring about a sustained reduction in the dollar's purchasing power. To explain why we first need to quickly revisit the over-used concept of money "velocity."

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