How Credit Suppresses the Gold Price (with Alice and Bob)

Alternative title: How Credit Creates Inflation
Alternative title: How Gresham’s Law Destroys the Gold Standard

Our small closed economy has five main protagonists, Alice the Automobile Saleswoman, Bob the Banker, Charlie the Capitalist, Dave the Debtor, and Steve the Saver. This small economy is on a gold coin standard, i.e. gold coins circulate as cash. In order to see how the real price of gold (measured in Ferrari sports cars) depends on the creation of credit, we consider the following scenarios.

  • A cash based economy without any lending and without any banks.
  • An economy with banks, but without lending.
  • An economy with banks and with fractional reserve lending.
  • An economy without banks, but with private-to-private lending.
  • An economy without banks, but with commercial Real Bills.

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