[lehighguy]

For simplicity lets state that the supply of gold is constant. This is close enough to true that it shouldn't be a problem as new gold mined only creates a small amount of inflation and can't be increased on demand.

If you have a one-to-one relationship between gold and money, this means the money supply will be constant. It will never increase or decrease.

Let's take your example of the expanding economy with only one good, cars. In year one we produce 100 cars and in year two we produce 105 cars. Meanwhile, the money supply remains a constant $100. In year one a car will cost $1, and in year two the car will cost $(1/1.05). That's right, prices went down.

Deflation was an ordinary sign of economic progress before the establishment of the fed. As incomes remained constant peoples standard of living increased as prices fell.

Deflation rewards savers. If you save your money you will be able to buy more goods and services with it tommorrow. Inflation rewards debtors, so it is no wonder why the US has steadily become the largest debtor nation in history.

So why have a fiat currency, who benefits? The people who get the money first benefit. I.E. the government, bankers, and the private parties that recieve money from the government. This effect is especially potent if the public believes inflation will be lower then it actually is.