[nickik]

I don't see a well working monetary system as a 'interventional instrument'. Its a inherent property of the system, not a outside system doing an intervention. Only since the time of central banks was this considered a 'intervention', because in many ways the central bank is the outsider.

> During the Gold standard, the bars were kept in vaults and we traded in convertible paper notes. The mint could always print notes of smaller or larger denominations if needed, but couldn't print more than it had bars to convert to. And that is the problem.

Maybe I am reading you wrongly, but the a ability to print larger or smaller notes is totally not relevant. A bank or minting house would actually always print more nodes/coins then they had bars to convert to gold. That is why minting coins was profitable in the first place. With Bank notes this became much more sophisticated.

The amount of notes in circulation was not directly determinate by the amount of gold, but rather by the flow of demands for gold (usually by other banks). As a bank you can get away with having 100x 1$ bills in circulation but you only had having 2$ worth of gold in your vault as long as the avg demand for gold per day is only 1$ worth. The other 98$ are invested in interest paying assets. Thus a bank always tries (tried) to maximize the amount of notes in circulation, but were always limited because other banks would demand gold if they got hold of your notes.

This system will thus lead to a situation where a increase in velocity (or decrease in demand) will automatically lower the amount of money in circulation because otherwise banks would not be able to hand out enough gold. This system effectively keeps nominal spending stable and that almost exactly what central banks are trying to do (its in fact better then inflation targeting if you look at most models).