Discussion about the gold standard often has advocates and critics talking past one another. One of the reasons is that there are members of both groups who do not know or, during the heat of argument, do not acknowledge that there have been many varieties of the gold standard. A free banking gold standard differs in important respects from other varieties of the gold standard. Here are key questions about the details of a gold standard, and the answers as they apply to its free banking form.
What is the legal foundation for payment in gold? Ordinary contract law. Government may establish a definition of a currency unit in terms of gold, but if so, under free banking the unit (say, the dollar) is merely a convenient name for the weight of gold, rather than saying that “a dollar is a dollar” no matter how much the gold content changes.
Is gold the only legal form of payment? No; payment can occur in any commodity or currency that people wish to use. This contrasts with the practice in some countries under various other forms of the gold standard, in which certain payments were only legal if made in national currency.
Who offers payment in gold? Anybody may do so. This means lenders and borrowers may agree to "gold clauses" in contracts. In many countries, governments have nullified such clauses after abandoning the gold standard or after moving to a more restrictive form of the gold standard where people have less freedom to own and pay in gold.
What forms of money and credit are payable in gold? Any that the issuers of those forms wish to offer.
Is production of any of these forms a legal monopoly? No; in particular, under a pure free banking system there is no legal monopoly of notes or coins, so they are competitive in the same way that deposits are competitive. In most historical free banking systems, issuance of notes was competitive but issuance of coins was not.
Who can demand payment in gold? Anybody who holds a liability that an issuer has made payable in gold. This contrasts with the Bretton Woods gold standard as it existed in the United States, under which Americans were prohibited from owning gold bullion.
Are there restrictions on the purposes for which people can demand payment in gold? No, there are no exchange controls or like restrictions. Again, this contrasts with the Bretton Woods gold standard, under which most countries on the standard imposed exchange controls.
What legal penalties exist for people or organizations that break their promise to pay in gold? The standard penalties applying to breach of contract. Observe that this differs from a central banking gold standard, in which the central bank cannot be sued for breach of contract if it devalues.
Is fractional reserve banking permitted? Yes; so is 100% gold reserve banking, but as George Selgin commented in a post some time ago, there have been no historical cases in which 100% gold reserve banking has dominated in competition with fractional reserve banking. I would expect there to be some 100% gold reserve banks, appealing to people who did not trust regular banks and were willing to forego interest, but I would expect such banks to hold less than 1 percent of all banking assets.
Are taxes only payable in gold? Perhaps. It should not make much of a difference if a free market in foreign exchange exists.
Is accounting in units other than gold permissible? Yes, but perhaps everything has to be converted into gold units for tax purposes. This is an area where I think more work is needed to explore whether there are important implications for monetary freedom.