I'm pretty sure he wouldn't say that gold is inherently valuable. If you agree that economic value is subjective then nothing really has inherent value. What's remarkable about gold is that it is free market money: when a monpoly on the supply of money is not enforced over an economy, it almost invariably chooses gold. This is what makes gold special. And it's easily understood why a free market would choose gold as money, since it satisfies all the properties we can think of that a money commodity should satisfy: high value to weight ratio, non-decaying, fungible, highly malleable, etc. It has all sorts of industrial and cosmetic uses. Gold is the quintessential money commodity.

If you compare that with fiat money, there is clearly a world of difference. We use unbacked paper money because the government monetary authorities are enforcing it as legal tender. The money is useless, can be manipulated and debased by the government for the achievement of their own political objectives, and will collapse whenever the government collapses.

Without fiat money, there could be very little deflation or inflation. The money supply would grow or contract only as the supply of gold (and probably silver) grew and contraced. Much would depend on the nature of the banking system - if there was a free banking regime, then it is likely that only those banks with very high (close to 100%) gold reserves would be successful. And then the money supply would be basically constant.

With regard to the incentive to invest, let me put it this way. Suppose I said that I was going to steal 10% of your savings every year - would this make you more or less likely to invest? And do you think that this would be good for the economy? I ask you this because, unfortunately, inflation amounts to little more than the theft of people's savings, through reductions in their purchasing power. A similar effect would be created if those people who receive the newly created money or money substitutes simply took proportional amounts out of the accounts of others.

I will concede that inflation can stimulate investment through adjustments of the prevailing interest rate. A robust business cycle theory should demonstrate to you the deleterious effects of this action though, and the credit crunch of 2008 is an excellent example. By sending entrepreneurs false signals about people's real time preferences (i.e. that the savings rate is higher than it really is), all sorts of malinvestments are inevitably produced. The massive new supplies of money are pumped into sectors of the economy (the stock market or the housing market for example) where the structure of production becomes strained and imbalanced, with an inevitable bust.

In short, investment-stimulating inflation cannot be good for the overall economy. False interest rates and money pumping distort the structure of production away from that whch reflects people's true preferences. Grossly irresponsible monetary policies can eventually lead to hyperinflation and the destruction of the currency.

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