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?

Question

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?

In: 339

Answer 1

In theory you can have deflation so the price of everything falls and so you don’t need more cash gold to go around.

But your question is right.. not having enough cash gold would be problematic and probably lead to band-aid solutions like bank script or stretching fractional reserve banking to the max. It’s a flaw you get with X backed currency.