[fennecfoxen]

> How much is this currency supposed to be worth? According to this argument, any number is potentially valid!

Well, I guess the number is whatever supply-and-demand should happen to say that day. Mostly that'll mean asking "how much do people want gold today?" because the supply is relatively inelastic.

That said, fluctuations in the supply of gold and the price of gold would in fact be catastrophic if the price of gold radically changed. See also: the impact of gold rushes on the US economy (tip: it was inflationary). See also: Bimetallism, William Jennings Bryant, "you shall not crucify mankind upon a cross of gold!"

> If the exchange rate of the dollar decreases, you'll see the Federal Reserve will start trading some of its goodies from Fort Knox (gold, etc.) for US Dollars, in order to maintain the dollar's exchange rate/value.

... No? Wrong? Lies? What the Federal Reserve does is buy and sell federal debt, creating and destroying dollars such that the supply of dollars matches the demand for dollars and prices are consistent. You could say the dollar is loosely pegged to the value of the consumer bundle, maybe. (See also: http://bls.gov for CPI information.)