eli5: How does an economy grow if the money supply doesnt increase in that same year? In gold standard suppose, gold reserves are not increased but economy still manages to grow. How is that possible, how is an economy growing on a stable money supply?
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Money is a system of transferable debt (may be to some particular institution, as in a corporate bill or a credit company, or just anyone recognising the token, as in a bank note or a coin). There is no particular limit on the amount of debt issued at any one time – it’s always coming and going through multiple channels. There is a lot of effort put into sorting the different grades and keeping the amount roughly consonant with the amount of goods and services available. The gold standard was one of these efforts – but gold only ever covered a fraction of the money supply. It was basically a test – if you doubted the worth of the note you demanded to see the gold backing it. Of course, if everyone demanded gold the system would collapse, but the big players – Bank of England, Bank of France etc, kept the system stable by limiting runs.
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