Say that you are an inventor. You have just figured out a way to implement cold fusion. The solution has been published in Nature. It’s been reviewed by everyone who understands the physics on the planet and they all agree that it’s a slam dunk. So you go to the bank to ask for a loan, to build the mechanism.
Unfortunately, humans had completed digging up all gold the week previous. Sorry, we understand that all the money from several industries would eventually be freed up by your discovery, so as to finance new technologies like this one. But since those industries are still in place and there’s no more gold to dig up, we’re going to have to ask you to wait until we discover new gold somewhere in outer space.
The goal of gold standardists is, basically, just this. They want to cap the total amount of money, so that governments can’t just infinitely go into debt. But the way that markets work is that they expect that debts today are paid off by gains in efficiency tomorrow. We finance something that allows us to produce double the amount of food with half the labor, freeing up resources to work on new things. The original loan is paid off by profit from the new technology, and the world is a better place. Improved technology and efficiency are, at the end of the day, the whole purpose of the free market.
The timing of money being asked for and paid back probably fluctuates based on major scientific (or other) discoveries. Shortly after such a discovery, a lot of debt will be created, and this will be followed by a period of paying off those debts. In general, as can be seen by inflation, we’re expanding technology faster than we can profit from them, so the central bank goes into the hole faster than we can fill it, so there probably are no points in time where we’re actually paying money back faster than we’re borrowing it, but there almost certainly are cycles of greater and lesser rates of debt growth.
Any one of these bursts of borrowing is going to be linked to human expectation that the new discoveries will bring great gains. Besides the companies borrowing from banks, they also get investment money from individuals. The individuals and the banks, who are lending out money, expect returns on their investment at some level of probability.
Now when suddenly this whole market for the new technology is capped out by the gold system, it throws everything into a spin. We want to do it. We’ve run the math on the odds of success of any one venture, the potential benefits of the technology to society. We’re planning out new cities with this technology in mind. And suddenly the Earth just flips us the bird going, “Nope. If you wanted that, you should have dug more gold last week.”
Basically, it’s an arbitrary cap that has no relation to the actual market position or health at any given moment. And it tends to throw the market into a spin - causing recessions and depressions - when people forget to take into account that this arbitrary limit will jump up and block the future of the world, against all reason. And the only argument for it is to stop the government - which is a small part of the economy - from overrunning its debts.
Certainly, there are times when the government and when investors and bankers should have the brakes put on them. They plan poorly, speculate to wildly, too often, or what have you. But adding the gold standard doesn’t really help any of that. The blockade stops everything, at random times, with no link to how wise or unwise it was.