[sjg007]

Nothing stops the except the law. What they are doing in your scenario is fractional reserve banking. They could create more "money" in this case up to whatever leverage limit they would be allowed by law. So at some point your gold hits a max value and your economy can't grow beyond that point. This causes deflation. As far as I understand it deflation means that something that cost $5 now costs $2.5 in real terms. However, producing that thing may still cost $3 so unless you've made productivity and efficiency gains you are losing money. More importantly there is no incentive to spend money today because your money will buy more tomorrow. So then you only buy what you absolutely must.

[logicallee]

thanks, this was interesting.