How does the economy grow? It doesn't grow because one day a storm brings in a flood of new sea shells which doubles the money supply. The supply of real resources is still fixed.
The supply of natural resources also stays the same in an economy where money is created by fiat rather than supplied by accidents. The difference is if the population of 35 people expands to 70, or if the amount of economic activity doubles, the islanders will have to hope a storm comes along to double the money supply or else there will be a shortage of money (deflation) which will result in hoarding and desperate price-cutting (depression). It may sound like fun to live in an economy with falling prices, where one gets relatively richer than one's neighbors just by hoarding money, but people who lived through such episodes will disagree. When everyone is hoarding during a money shortage, there's no way to make a living. It's a game of chicken with starvation, where people get to decide how long they can hold out before they spend their last dollar / gold chain link on food.
In the U.S. in 1960, MI (cash, traveller's checks, etc.) was about $140 billion. We are now at $3,930 billion. This is like the storm hit the island and multiplied the number of trading shells 28x. Also in that timeframe, real (inflation-adjusted) GDP per capita increased from about $18k to about $58k. Meanwhile, the population increased from about 178M to about 330M.
https://fred.stlouisfed.org/series/M1NShttps://fred.stlouisfed.org/series/A939RX0Q048SBEAhttps://fred.stlouisfed.org/series/POPTHMSo, more people producing more economic output with more money. What would have happened if a law was passed in 1960 saying the US had to maintain M1 at $140 billion forever, and could never expand the amount of cash in circulation? I'm guessing something similar as would have happen if the food supply were arbitrarily frozen at a 1960 quota - disaster!
Here's a second point. The supply of gold is expanding too.
Thousands of tons of the stuff are produced every year, and production has accelerated over time. The price of gold in fiat money would crater due to oversupply if it were not for an expanding world population and GDP - i.e. more people with fiat money buying engagement rings, computer processors, and whatnot. The supply is highly cyclical because mining investment lags and attempts to predict demand by many years (see chart below). But my question is, how is it more "sound" to constrict money supply based on these fluctuations in industrial commodity supply, rather than the more data-responsive approach that is possible with fiat currencies?
That is, how would the economy be more stable and prosperous if the expansion of the money supply looked like the gold production chart instead of the smooth line chart for M1?
Third question. In a gold based economy. What is the ideal percentage of economic activity devoted to digging up gold? 0.5%? 1%? 20%? 68%? I suspect it would be much higher than we have today, which raises the question: If a large percentage of the population had to labor in mines just to maintain the growth of a monetary system, wouldn't a competing economy that could expand the monetary base effortlessly and employ all those miners in more productive pursuits experience higher growth and living standards? This is a play on Keynes' question about whether paying people to dig holes and fill them back in should be considered economic growth. A gold-based economy would have to occupy lots of people and resources doing exactly that.