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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OP, your question is smarter than the top replies.
The economy basically doesn’t grow unless the money supply increases in the money supply to match it. Every gold standard the USA has implemented has collapsed for the same reason that it doesn’t sustain itself. We’ve had many different gold standards.
Every period of growth during a gold standard came on the backs of huge private debt increases from bank loans, or new sources of gold acquired from mining or from exported goods for gold.
While the real economy (total goods and services, distributed among total population) is separate from money as a phenomenon, and the actual work of growing an economy is the work to make more, new, better, etc, stuff, we know that in a moneyed system a lack of money means people aren’t making the stuff, aren’t inventing the new tech, they’re just hungry and unable to buy tools.
People who don’t know their economic history can try to talk about how we’ve had deflationary growth and the (original) great depression of the 1870s-1890s is a myth, but if you trace bank lending and gold stocks and go into those years, the parts that hold up “the economy grew” was the part where there were money increases, and the parts that get that era called a depression are when money increases didn’t match economic increases.
People will furthermore argue money velocity. But money velocity isn’t known to speed up when money itself gets tightened. Indeed, quite the opposite. Any sustained growth will need an increasing money supply.
**So the shortest answer is “it grows because** (when….) **banks lend new money into existence faster than the loans are repaid, regardless of gold.”**
A longer answer is a caveat “and this is more likely when governments can push interest rates down by acquiring new gold, or when governments are forced to spend new money regardless of gold”
But a longer answer is “financial crisis destroys the gold standard and the government has to fix money through massive spending such as ww1, great depression 1930s edition through ww2, etc, or when the government spends its way out of being able to maintain a gold standard such as the 1950s-60s”
source: actually studied this. Actually-actually.
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