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5 - Gold & Silver Units & the True Money Supply

Gold and Silver as the Monetary Unit

As a commodity, the unit of account for money is the weight of gold and silver. For the purposes of this discussion I will use ounces. It should make no difference to us what shape the gold and silver comes in, all that matters is its weight. Usually the metals are forged into coins for smaller, day-to-day transactions, and into larger bars for bigger transactions.

The True Money Supply

The supply of money is therefore the total weight of gold and silver existing in society.

Does an increase in the supply of money make us richer?

“What would happen if, overnight, some good fairy slipped into pockets, purses, and bank vaults, and doubled our supply of money. In our example, she magically doubled our supply of gold. Would we be twice as rich? Obviously not. What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labour, and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its new-found wealth, prices will, very roughly, double.”1

It seems intuitive that the price of commodities depends on the proportions of money and commodities in existence. Any considerable alteration of either of them has the same effect – either a heightening or lowering the prices. Increase the quantity of commodities and they become cheaper in their abundance; increase the supply of money, diluting its value, and commodity prices will rise.

So, over the long run, changes in the money supply have no impact on the wealth of the public.

Does the Money Supply Need to be Regulated by Government?

We can also deduce from the above that it makes no difference what the money supply is, since a rise in the money supply reduces the purchasing power of each gold or silver ounce, while a fall in the money supply increases the purchasing power of each ounce. The free market will simply adjust by changing the purchasing power, removing the need to tamper with the money supply. There is no need for the supply of money to be regulated.

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