A given weight of gold is originally given this name, say £1, and acts as the standard of prices, and thus the name remains, but the actual value of this standard falls over time, reflected in a rise in the general level of prices. Not all prices rise proportionally, for the reasons described previously, that the value of each commodity itself changes disproportionately, because productivity rises or falls by varying amounts in each sphere. Periodic large falls in the value of gold, cause a reduction in value of the standard of prices, but, the continual source of its devaluation is the reduction in its actual metal content. That occurs due to the clipping of coins, as well as a deliberate debasement of the coinage by the state, as a means of paying its debts.
As coin, gold initially exchanges with other commodities, at its nominal value, even though the coin may contain 10% less gold. But gold coins can be melted down into bullion, just as gold can be minted into coin. If coins that are 10% light are to be exchanged for gold, then they would be put on the scales, and their actual weight, as opposed to their nominal weight would determine how much gold they would buy.
“Sovereigns are clipped and debased and the surplus gold goes into the melting pot. When 4,672½ gold sovereigns placed on the scales weigh on the average only 800 ounces instead of 1,200, they will buy only 800 ounces of gold on the gold market: in other words, the market-price of gold has risen above the mint-price. All sovereigns, even those retaining the standard weight, would be worth less as coin than in the shape of bars. Sovereigns of standard weight would be reconverted into bars, a form in which a greater quantity of gold has a greater value than a smaller quantity of gold. When the decline of the metal content has affected a sufficient number of sovereigns to cause a permanent rise of the market-price of gold over its mint-price, the coins will retain the same names of account but these will henceforth stand for a smaller quantity of gold. In other words, the standard of money will be changed, and henceforth gold will be minted in accordance with this new standard. Thus, in consequence of its idealisation as a medium of circulation, gold in its turn will have changed the legally established relation in which it functioned as the standard of price. A similar revolution would be repeated after a certain period of time; gold both as the standard of price and the medium of circulation in this way being subject to continuous changes, so that a change in the one aspect would cause a change in the other and vice versa. This accounts for the phenomenon mentioned earlier, namely that, as the history of all modern nations shows, the same monetary titles continued to stand for a steadily diminishing metal content.”
This is Gresham's Law, in which bad coin drives out the good. Owners of debased coins would attempt to pass them on at their nominal value, in circulation, whilst those with full weight coins would take them out of circulation, and melt them down into bullion. As Marx says, the result of this is a periodic re-basement of the coinage, so that the coin, officially, is recognised as containing less gold, so that its value falls, and all prices measured by it rise.
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