Why fixed exchange rates make sense
The short answer: A dollar is actually the name for a specific unit of gold, just as an inch is the name for a specific unit of a yard. An inch cannot "float" against a centimeter. They are both simply names for units of measurement. The confusion stems from moving those names away from their original meanings.
The long answer: Currency Devaluation and Economic Growth By Frank Shostak (Posted October 3, 2003) - see "Can currency depreciation take place in a free market?"
Within the free market, there cannot be currency depreciation as such. Since in a true free-market economy money is gold, there cannot be an independent entity such as a "dollar." Prior to 1933, the name "dollar" was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67. Now, $20.67 is not the price of one ounce of gold in terms of dollars as popular thinking has it, for there is no such entity as a dollar. Dollar was just a name for 0.048 ounce of gold. On this Rothbard wrote, "No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, cars, and gold. 3
Likewise, the names of other currencies stood for a fixed amount of gold. The habit of regarding these names as a separate entity from gold emerged with the enforcement of the paper standard. Over time, as paper money assumed a life of its own, it became acceptable to set the price of gold in terms of dollars, francs, pounds, etc. The absurdity of all this reached new heights with the introduction of the floating-currency system.
In a free market, currencies do not float against each other. They are exchanged in accordance with a fixed definition. If the British pound stands for 0.25 of an ounce of gold and the dollar stands for 0.05 ounce of gold, then one British pound will be exchanged for five dollars. This exchange stems from the fact that 0.25 of an ounce is five times larger than 0.05 of an ounce, and this is what the exchange of 5-to-1 means.
In other words, the exchange rate between the two is fixed at their proportionate gold weight, i.e., one British pound = five US dollars. The absurdity of a floating currency system is no different from the idea of having a fluctuating market price for dollars in terms of cents. How many cents equal one dollar is not something that is subject to fluctuations. It is fixed forever by definition. 4
NOW I get it!