The Mystery of Banking

before
prices had a chance to rise; 
they
certainly benefited. Those people, on the other hand, who
decided to wait a few days or weeks before they spent their
money, 
lost
by the deal, for they found that their buying prices
46
The Mystery of Banking
4
With apologies to David Hume and Ludwig von Mises, who employed
similar models, though without using this name.
Chapter Four.qxp 8/4/2008 11:38 AM Page 46

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rose before they had the chance to spend the increased amounts
of money. In short, society did not gain overall, but the early
spenders benefited 
at the expense
of the late spenders. The prof-
ligate gained at the expense of the cautious and thrifty: another
joke at the expense of the good Angel.
5
The fact that every supply of M is equally optimal has some
startling implications. First, it means that no one—whether gov-
ernment official or economist—need concern himself with the
money supply or worry about its optimal amount. Like shoes,
butter, or hi-fi sets, the supply of money can readily be left to the
marketplace. There is no need to have the government as an
allegedly benevolent uncle, standing ready to pump in more
money for allegedly beneficial economic purposes. The market is
perfectly able to decide on its own money supply. 
But isn’t it necessary, one might ask, to make sure that more
money is supplied in order to “keep up” with population growth?
Bluntly, the answer is No. There is no need to provide every citi-
zen with some per capita quota of money, at birth or at any other
time. If M remains the same, and population increases, then pre-
sumably this would increase the demand for cash balances, and
the increased D would, as we have seen in Figure 3.6, simply lead
to a new equilibrium of lower prices, where the existing M could
satisfy the increased demand because 
real
cash balances would be
higher. Falling prices would respond to increased demand and
thereby keep the monetary functions of the cash balance-
exchange at its optimum. There is no need for government to
intervene in money and prices because of changing population or
for any other reason. The “problem” of the proper supply of
money is not a problem at all. 
2. T
HE
S
UPPLY OF
G
OLD AND THE
C
OUNTERFEITING
P
ROCESS
Under a gold standard, where the supply of money is the total
weight of available gold coin or bullion, there is only one way to
The Supply of Money
47
5
Mises, 
Money and Credit
, pp. 163ff.
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increase the supply of money: digging gold out of the ground. An
individual, of course, who is not a gold miner can only acquire
more gold by 
buying
it on the market in exchange for a good or
service; but that would simply shift existing gold from seller to
buyer. 
How much gold will be mined at any time will be a market
choice determined as in the case of any other product: by estimat-
ing the expected profit. That profit will depend on the monetary
value of the product compared to its cost. Since gold 
is
money, how
much will be mined will depend on its cost of production, which in
turn will be partly determined by the general level of prices. If over-
all prices rise, costs of gold mining will rise as well, and the produc-
tion of gold will decline or perhaps disappear altogether. If, on the
other hand, the price level falls, the consequent drop in costs will
make gold mining more profitable and increase supply. 
It might be objected that even a small annual increase in gold
production is an example of free market failure. For if any M is
as good as any other, isn’t it wasteful and even inflationary for the
market to produce gold, however small the quantity? 
But this charge ignores a crucial point about gold (or any
other money-commodity). While any increase in gold is indeed
useless from a monetary point of view, it will confer a nonmone-
tary social benefit. For an increase in the supply of gold or silver
will raise its supply, and lower its price, for consumption or indus-
trial uses, and in that sense will confer a net benefit to society. 
There is, however, another way to obtain money than by buy-
ing or mining it: