Money supply

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    Under a gold standard or a 100 percent reserve banking system, how would interest payments be made without an increase in the supply of money? In other words, doesn’t a growing economy need inflation?


    First, a monetary system with commodity money and money certificates (i.e., 100 percent reserve money substitutes) would not have a fixed money stock. As an increase in the demand for money raised money’s purchasing power, it would make the production of coins more profitable and entrepreneurs would respond by increasing the production of coins. So, the money stock in a market economy would adjust to the demand for money in the same manner as the production of any good adjusts to the demand for it.

    Second, if people were using a commodity for which it was not possible, say for technical reasons, to increase its production and this created difficulties for trading, then entrepreneurs would step in and provide a different commodity for which this problem did not exist. If gold is too restrictive in its production, then people will use silver.

    Third, the claim that if the money stock were fixed, then there would not be enough money to pay interest is completely false. The structure of prices adjusts to the money stock, whatever it happens to be. Interest, which is the price spread between selling prices of output in the future and buying prices of inputs in the present adjusts with the level of prices overall. If people had twice as much money, then both buying prices of outputs and inputs would be twice as high. And if people had half as much money, then both buying prices of outputs and inputs would be half as high. Put another way, if there was not enough money to buy all the output to be produced, then prices of output would be lower, but so would the prices of inputs and therefore, interest would remain.

    Fourth, the claim ignores the fact that money demand can change. With the same amount of money people can buy more goods at higher prices if their desire to hold money is less intense.

    Here is Tom Woods on the Greenbackers:

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