by Frank Shostak, Mises Institute:
The heart of economic growth is an expanding subsistence fund, or the pool of real savings. This pool, which is composed of final consumer goods, sustains individuals in the various stages of the production process. The increase in the pool of real savings permits the expansion and the enhancement of the infrastructure, and this strengthens economic growth. An increase in economic growth for a given stock of money implies more goods per unit of money. This means that economic growth, all other things being equal increases the purchasing power of money.
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Note that most individuals are likely to strive to improve their living standards. This means that individuals are likely to aim at expanding the pool of real savings, which will in turn strengthen economic growth and the purchasing power of money. In the framework of market-selected money such as gold, the purchasing power of money is likely to strengthen over time.
According to Joseph Salerno,
Historically, the natural tendency in the industrial market economy under a commodity money such as gold has been for general prices to persistently decline as ongoing capital accumulation and advances in industrial techniques led to a continual expansion in the supplies of goods.
Hence, in the framework of a gold standard, the purchasing power of financial assets such as stocks and bonds is likely to strengthen alongside economic growth. Note that stronger economic growth, all other things being equal, implies a strengthening in the pool of real savings; i.e., the pool of final consumer goods.
Under the present monetary standard—i.e., the paper standard—an increase in the quantity of money, because of the loose policy of the central bank, undermines the pool of real savings and in turn undermines economic growth. (Observe that loose monetary policy sets in motion an exchange of nothing for something.)
As long as the pool of real savings is expanding, the increase in the money supply creates the illusion that the central bank can generate real economic growth and strengthen assets’ purchasing power. However, once the pool of real savings comes under pressure because of the monetary pumping, the growth in assets’ purchasing power starts to slow. According to Richard von Strigl,
Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides labourers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. . . . The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be.
The Subsistence Fund and Money
When producers exchange their produce for money, they can then exchange their money for various consumer goods; i.e., they can access the subsistence fund whenever they deem this necessary. When an individuals exchanges their money for goods, this is an act of exchange and not an act of payment—money is just the medium of exchange. Payment is made by means of various goods.
For instance, a baker pays for shoes by means of the bread he produced, while the shoemaker pays for the bread by means of the shoes he made. (Both shoes and bread are part of the subsistence fund, as they are final consumer goods.) When the baker exchanges his money for shoes, he has already paid for the shoes with the bread that he produced prior to this exchange.
Trouble erupts when, on account of loose monetary policies, a structure of production emerges that ties up much more consumer goods than it creates. This excessive consumption relative to the production of consumer goods leads to a decline in the subsistence fund, meaning that there is less economic support for the individuals that are employed in the various stages of the production structure. This results in an economic slump.
Intermediate Goods
What about a producer of intermediate goods, like a producer of a special tool—what is his contribution to the subsistence fund?
An individual who exchanges his money for the tool will employ the tool in the production of final consumer goods or in the production of other tools and machinery that, in turn, will contribute to the production of final consumer goods sometime in the future. The producer of the special tool does not directly supply final consumer goods. However, he does offer means to secure these goods. He also offers time.
