So one topic I get confused on is- would you need more money chasing goods when the economy and population grows? If people used gold as currency- and lets say there was a fixed amount being circulated in the country- would there be a need for more gold as the population and amount of goods produced rises? Or would the prices of everything just continue to drop as the population(and hence demand for all goods) increases?
If the amount of goods/capital increases faster than the population, that is, people get richer, and the amount of gold is more or less fixed, the prices will drop.
What if theoretically the amount of goods/capital increases just as fast as the population- or if the population grows faster than the amount of goods that are produced- are prices still going to drop?
Actually there’s no way to exactly know what will happen. There’s no way to mathematically model what’s going on - despite what mainstream economists think =]
What can roughly happen, is, I think :
If capital increased as fast as population and the amount of gold used as money didn’t change, nominal prices wouldn’t change.
If population grew faster than capital then prices would go up.
“So one topic I get confused on is- would you need more money chasing goods when the economy and population grows? If people used gold as currency- and lets say there was a fixed amount being circulated in the country- would there be a need for more gold as the population and amount of goods produced rises?”
There would not be a “need” per se, but there would be an increase in the demand for money(gold, in this case) as there would be more persons desiring to use gold as a store of value. This in itself is not a problem. Let’s say there were 1 million tons of gold in the world and that’s it, every last atom of it has been mined out of the earth and no more can be had. That 1 million tons of gold can serve the function of money to kingdom come because the amount of money is immaterial to solving the problem of a double coincidence of wants in a barter economy. More money does not “better” solve the problem of a double coincidence of wants.
However, there is a logistical problem. At $450/oz. (pre-bubble gold price… who knows what the “true” price of gold is right now… ugh), you need a 1/2800th of an ounce of gold to buy a 50c Snickers bar. Obviously, it is not logistically feasible to mint 1/2800th oz. gold coins. Silver helps alleviate this problem as 1/20th oz. of silver (@ $10/oz. pre-bubble silver price) would be equivalent to 50 cents and a 1/20th oz. coin could be minted. I suspect that this is why silver has typically coexisted with gold despite the Misesian thesis that one and only one commodity will eventually take the role of money in a free market.
I don’t think there’s any “perfect” solution to this problem. Gold itself is not perfect - gold mines inflate the gold supply, though very slowly. You could have a stricly coin-only economy to prevent credit expansion, but you will have to have prices independently denominated in at least two, maybe three metals (gold, silver, copper). You can use notes, but we all know the problems with that. The best (not perfect) solution is to let the market have free reign to try all possible solutions simultaneously and choose the best solutions by market selection. Money in a free market would probably look very much like it did during the wildcat era - some coins co-circulating with paper and, today, perhaps some cryptographic forms of money, with exchangers playing the role of currency watchmen. There is some overhead in this system, as the inflationists are always quick to point out, but 95 cents on the dollar per century? The overhead of an monopoly, inflationary fiat currency is certainly far higher than the cost of market money.
“Or would the prices of everything just continue to drop as the population(and hence demand for all goods) increases?”
It is the demand for money which increases proportionally with population. More goods and services can always be produced with more people, but money supply is relatively fixed (the market chooses a commodity for which this is the case specifically to protect property).
Clayton -
"If capital increased as fast as population and the amount of gold used as money didn’t change, nominal prices wouldn’t change.
If population grew faster than capital then prices would go up."
I think a better way to look at it is to treat money as just another good, then divide the economy into money and non-money goods. More people means that there will be more demand for chairs, but more people also means that more chairs will be produced (more hands to produce them). This is true of most non-money goods. If we take money to be synonymous with gold, then we would expect that as population increases, more gold will also be produced. But far more non-money goods will be produced per unit increase in population than money goods. That is, the ratio of non-money goods production to population is always larger than the ratio of new gold production to population. The market has selected gold in part because of its rarity, which helps ensure that, as population increases, gold production cannot increase as quickly as production of non-money goods.
In other words, with an honest money system, there is every reason to expect that prices of most goods (including labor) would gradually fall over time. That gives you an idea just how upside down our monetary system is that we live in a world where the prices of things continually rise. I don’t understand why most economists just treat this as if it’s no big deal. What could be more important to the study of economics than the medium of exchange that makes possible an exchange economy in the first place?!
Clayton -