Today we started the topic of money in our course on political economy in my school. At one point the teacher said that as economies developed, there was not enough gold for all the exchanges taking place. I replied that the quantity of gold is not important, goods and services would just be priced differently. Prices would fall because one ounce of gold could buy more stuff. She was skeptical of this idea. She said “I ask myself how these lower prices would be imposed upon the people.” I replied that nobody would have to impose lower prices because they’re determined by supply and demand. Apparently this was difficult back in the 17th century. I consider her theoretical arguments rather unconvincing but has it ever been the case that there wasn’t enough gold in an economy?
And do you have any ideas what I could tell her?
You could remind her that no one has to impose lower computer, cell phone, TV, and other consumer goods prices that occur year after year on us. Consumers are happy to pay lower prices and producers can still earn profit because capital accumulation has been driving down the prices of their inputs.
Silver has served more often than gold as a commodity money in history. The greater stock of silver relative to that of gold means its purchasing power is more suited to making everyday purchases of medium- and low-priced items. And the greater annual production of silver relative to that of gold means its purchasing power does not rise over time. In an unhampered market, people would choose a commodity money taking these facts into account. If they thought a rising purchasing power of money was problematic, they would choose silver instead of gold.