Yes, that is correct. Supply and demand would dictate that money was in shorter supply than it was relative to the amount of goods so the price of goods would fall and conversely the price of money would rise (the money would get more valuable and buy more).

The only problem that might come up is if the actual denomination of the money got to the point where there was not enough "small change".

As an example, in the early 1900's a 3 Musketeers candy bar was a nickel (for a fairly large candy bar). Because of inflation that candy bar would be something like $1 to 1.25 today. Let's say we kept sound money and the supply only grew by about 1.5% a year (which is about what the gold supply increases which is also about population growth). The candy bar might still be a nickel, but likely it would be less because farmers have learned to grow sugar more effectively and manufacturing has become more efficient. So assuming that the demand was the same then as today, maybe the same candy bar might only be 4 cents or 3 cents. But what if instead of gold backed money we had paper money and a strict Fed that did not ad ANY money to the initial money supply. They only replaced what wore out and the shadow banking system did not exists nor did fractional reserve banking expand any more than it already was (I know, a big stretch of the imagination, but just trying to show what would happen with an example). So if the money supply was exactly the same as it was in 1920 for example, the candy bar might only be a single penny (or even less, maybe two candy bars for a penny or the need for smaller denomination coins). So because of more people using the original supply of money and more goods available, the money would have grown much more valuable. Perhaps valuable enough smaller denomination coins would be needed.

The above example is extreme, and been unlikely that the money or credit would never have expanded even enough to offset population increase. But I do it simply as a mind exercise to show that our money does not have to consistently loose value for commerce to work properly.

But here is the catch. Who benefits from inflation and who benefits from naturally occurring deflation?

The entity that creates the money is the main benefactor of the new money creation. Debtors would also benefit but only to the degree that interest rate is less than the rate of inflation. If there is real interest rate (interest rate is above inflation) then another group gains, banks. And banks, by the way, are the creator of our money. So the way the system is designed is in favor of the banking system that has a monopoly over money creation. It was not always that way. The constitution only gives congress the power to coin money. Congress gave that power away in 1913. Kennedy took some of it back and we see what happened to him.

With deflation the people that choose to save benefit. Since over time the money gains slightly in value savings are encouraged. People have incentive to "save up" to buy a house or a car. With inflation it is much harder to "save up" for anything, so the opposite is encouraged. To go in debt and borrow. Who benefits when someone goes in debt and borrows? The banking system that is in charge and benefits from creating theri new money (Federal Reserve notes are property of the Federal Reserve System of member banks). They get paid to create more of it by charging interest on money that did not exist before the loan was made.

Would growth be inhibited in a more fixed money supply regime, or at least a more limited fractional reserve regime? Yes. We would have less growth. Money would be in shorter supply so the demand for money would be higher. When the demand for something is higher, it costs more to borrow it. So interest rates on loans would be higher. So growth expansion would be slower. Is this bad? Well the housing bubble and associated boom times would have never came about. More people would own their homes instead of being in hock. And the bust would not be here either and maybe a young person could actually afford to own a home. So instead of BOOM, bust, BOOM, bust, BOOM, bust - we would have slower, more steady growth tied to the actual productivity increases of our nation. So when all the manufacturing jobs went overseas and we started importing our basic living goods, it would have shown up rapidly as a bad thing because growth would have quickly became negative. We would have done something different. The way it has worked easy money via the expansion of debt and low interest rates allowed us to borrow and buy instead of earn and buy. Our money got worth less, but there was plenty of cheap credit to replace the manufacturing and the real economy that was gutted. Well guess what? Today we are at the end of borrowing and the bill is due. Which would have been better in the long run - a slow moving growth economy that got in trouble when it made a mistake, or a boom economy that finds out it lived high on the credit card and now the bill is due? Living in the generation I am in, I would say it has been a good time. When our grandkids figure out what we did to them, we may find out the rest homes are not a nice place to end out our years. They ought to be pissed and kick our sorry butts out on the cold hard street. We deserve it. They are the ones being left with the party bill. All because of easy money policy masking what was happening in the real productive economy. That is what an expansive money supply gets us.

So there is no doubt that a flexible money supply (what that really means is an expansionary money supply, as if it ever tries to contract we get QE or low interest rates or whatever the current moniker is) causes growth booms. But it is that same expansive money supply that causes the boom turn to bust. Loose money (causes lower interest rates) encourages people to buy and build things that otherwise would not be economical if the easy money was not available. Since our money is created out of debt, that debt load along with interest has to be paid back (to guess who?). But since the expansion was brought about by cheap money rather than real capital it eventually leads to a point where the real productive part of the economy cannot support the debt load which was brought about by the easy money policy. In short, the easy money leads to easy street until it gets to a point it can not be supported, then it turns to a bust instead of a boom. So one of the very things the Fed had claimed they conquered (the business cycle), they actually are instrumental in making worse.

So here we are. Unsustainable debt. Instead of the Fed letting the market bring things back to equilibrium (housing prices come down to where someone can actually afford to buy one) they instead pump more easy money into the system. Does it solve the problem? No, it only delays the inevitable (not to mention keeps all the banks from going bankrupt), where debt is extinguished to the point that the productive part of society can support the debt load. The easy money and low interest rates are to "help" the borrowers keep from defaulting. Does the banking system want to be paid back with cheaper dollars? Of course not. But if the alternative is defaults on the loans that would put the system out of business (cause they only have a small part of their own equity backing it up), then inflation so people can pay their bills easier is the lesser of the two evils. They can live to loan another day.

The low interest rates are really a bank bail out. If they wanted to stimulate the economy via inflation they would simply give the money directly to the people. The people would spend it and pay down loans. But instead the loans are kept in place by making them somewhat affordable through low interest.

If you follow it all through logically, it is all about the banking system. Keeping the banking system afloat, keeping us thinking we can not live without the current system, and keeping their hegemony on the creation of new money. There are other systems that are better for the people. But it is not about the people, it is about monied interests. Follow the money and see who benefits, and you will see why they are desperate to maintain the system and do everything in their power to make sure there are no new ideas about a different system that sees the light of day,

There is a lot more to it than that, but without writing a book I can not begin to explain it all.

I'm not against banking. I'm not against borrowing or loaning money out. But the way the current system is big money center banks are at a big advantage and the cost of that advantage is paid by the citizens that use the system. And we have no alternative (just try going outside the banking system and deal everything on a cash basis and see where it gets you). They have a monopoly that greatly favors their own system while the rest of us pay for it in seigniorage and boom and bust cycles.

Nathan Rothschild said (1777-1836): "I care not what puppet  is placed on the throne of England to rule the Empire. The  man who controls Britain's money supply controls the  British Empire and I control the British money supply."

"Give me the control of the credit of a nation, and I care  not who makes the laws." The famous boastful statement of  Nathaniel Meyer Rothschild, speaking to a group of  international bankers, 1912: "The few who could understand  the system (cheque, money, credits) will either be so  interested in its profits, or so dependent on its favours,  that there will be no opposition from that class, while on  the other hand, the great body of people, mentally  incapable of comprehending the tremendous advantage that  capital derives from the system, will bear its burdens  without complaint, and perhaps without even suspecting that  the system is inimical to their interests." The boastful  statement by Rothschild Bros. of London.    Source

Not one in a thousand people understand the system and who it benefits. The bigger the lie, the easier it is to believe, for who would lie so big?

John