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Currency and Population Growth.

In Money Supply on July 3, 2011 by CQCA

Supporters of a fiat currency system believe a gold standard is too rigid, but always seem to point to some other indicator, such as productivity or population growth, as a metric for expanding the money supply.

The supply of gold in the world is limited. It does not change much in quantity from year to year. One ounce of gold will always be worth one ounce of gold. The only way to increase the money supply in a gold standard is to extract more from the earth or find alternatives to what is already consumed.

Increases or decreases in productivity cannot be objectively measured. It can be observed, such as the fact that it now takes hours to travel around the world, instead of years. But, there is no way to objectively measure it. Whether the money supply should be increased by 4.3% or 4.4% after the development of the iPad 2 would be up to the opinions of the central planners. The productivity argument also overlooks the fact that increased productivity in any industry would most likely find its way into the mining and metal processing sectors, which would increase the quantity of money in a gold standard. So in essence, a gold standard would accomplish the same goal, but without a central bank.

Population growth is more objective, considering population is much more easy to measure. The question, though, is how much money we should allocate per person. I used data from the top 20 economies by GDP and divided their most recent M2 money supply data by their total population. The results were then converted into U.S. Dollars using December 31, 2010 exchange rates.

Each country has a vastly different amount. If there were some objective, natural amount of money that should circulate per person, there would probably be more consistency in the numbers.

The other problem for both systems is distributing the money. Under a gold standard, mined gold would be used to buy other goods required for mining (such as food, water, clothing, housing, etc.) This would allow wealth to flow directly to the wealth creators (be they directly involved with mining or not). If a central bank increases the money supply to reflect their opinion of productivity, that money would be unevenly distributed to whomever borrowed the money first. If population were used as a metric, the only logical way would be to give inflated dollars to newborns and confiscate money from dead people and destroy it. This would create a society I do not want to live in.

Most central bankers claim to rely on some form of productivity to increase the money supply. This has never succeeded. All fiat currencies have ended in hyper inflation, all the way back to the first real fiat currency, issued by the Mongolian empire. Population measures, to my knowledge, have never been used. Gold has been currency for thousands of years. It still is.

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