One of the arguments used against having gold serve as a form of money is that the money supply has to grow.  While new gold is mined from the earth, it may not be enough to keep up with production, argue the gold critics.  Even some who are otherwise sympathetic to the free market will use this as an argument against gold.

If production increases at a faster pace than the gold supply (or any form of money), it is argued by some that this will not accommodate the demand for money.  Small amounts of gold already carry a high value, and this will only be exacerbated with increased production.

As I write this, gold is valued at about $1,250 per ounce.  Of course, if gold were used as a medium of exchange, we wouldn’t worry about the dollar value of gold.  We would worry about the weight of gold.  If the dollar were fully backed by gold, then the dollar/ gold price should stay the same.

Let’s say, for simplicity, that gold is valued at $1,000 per ounce.  That means that for a one dollar item, you would need to pay with 0.1% ounces of gold, or 1/1,000th of an ounce.  If capital investment and technology increase production at a strong pace (which is more likely under a free market monetary system), then that $1 item will likely gradually decrease in price.  This happens today with electronics, in spite of the existence of monetary inflation.

If that same item eventually went down to 10 cents, then you would need 0.01% ounces of gold, or 1/10,000th of an ounce.  It gets to be hard to pay with this amount of gold.  You would have to start using gold dust.

The market may turn to another metal (such as silver), or some other commodity, that has a lower value per unit.  But with today’s technology, there are many other options.

You could still use dollars (backed by gold) or some other type of certificate that represents gold.  A gold warehouse could issue 10,000 certificates that each represent 1/10,000th of an ounce of gold. The gold warehouse stores the gold, and the certificates are redeemable in gold.  The warehouse could put limitations on redemption, such that someone could not walk in with one certificate and redeem a tiny speck of gold.

With today’s technology, it is also not hard to imagine electronic digits that are backed by gold.  You could have a bank checking account with a certain amount of money that is backed by gold.  You could buy an item for 10 cents or 1/10,000th of an ounce of gold using a credit card, or a debit card, or your smartphone.  It might be something similar to Bitcoin, except the currency would actually be backed by gold.

The point is, the free market would figure this out.  It doesn’t have to be centrally planned.  With today’s technology, it would be rather easy for competing businesses to figure out efficient methods for using money.

And if things get continually cheaper simply because of increased production, this should be celebrated.  Price deflation that is a result of increased production means that we can purchase more with our money.  It ultimately means a higher standard of living.