I couldn’t find my question answered anywhere here so I figured I’d ask:
If you defined inflation as an increase in money supply beyond demand, would you define deflation as a increase in money that was less than demand? This would be a situation where there wasn’t enough money to keep up with the demand.
For example, if people were saving more money and spending less, the demand to hold money (dollars, gold, whatever) would rise. But if either a.) the fed didn’t print money fast enough, or b.) gold wasn’t mined fast enough, we’d have deflation, right?
Since this basically never happens in a fiat monetary system, it doesn’t seem interesting to discuss. But in a gold standard system, what would happen? I don’t think this is the same as the standard “there isn’t enough gold in the world to be on a gold standard” argument.
There are three possible options (which could conceivably occur simultaneously):
The price of gold would rise (relative to all other goods), and this would yield additional gold production, which would satiate the elevated demand for money
Banks would expand the supply of bank notes and credit (fiduciary media),
The higher demand for money would put downward pressure on domestic prices which would increase exports. This, in turn, would lead to a gold flow into the deflating nation, satiating the elevated demand for money.
In short, a nation could produce more gold, exchange domestic goods for foreign gold, or banks could increase the supply of money in the broader sense.
