Under the international gold standard, the price level tended to be relatively stable in the very long run. There were often significant changes up and down on a year-to-year basis, but over much longer periods of time the average inflation rate tended to be close to zero. Here is Josh Hendrickson:
I sometimes hear people, especially those who think that we should return to a gold standard, say something like “an ounce of gold has always bought a good men’s suit.” This is true. And advocates of a return to the gold standard like to point out that it takes the same amount of gold today to buy a good men’s suit, but it takes far more dollars to buy a suit today than it did in the past. Why is that? Price theory can tell you.
It’s true that an ounce of gold could buy a good suit of clothes back in 1924. But I don’t believe that is still true today. Instead, an ounce of gold can probably buy 5 or 6 good suits of clothes in 2024. To see why I make that claim, consider the change in the CPI from 1923 to 2023:
1923 CPI = 17.1
2023 CPI = 304.7
Now consider the change in the price of gold:
1923 gold price = $20.67
2023 gold price = $2000
Notice that the cost of living has increased about 18-fold, while the price of gold is up nearly 100-fold. That means that the relative price of gold has risen by 5 or 6 times. Today, an ounce of gold purchases 5 or 6 times as much as it did back in 1923. Why has this happened?
Suppose we think of gold as an asset that people like to hold as a hedge against various types of risk (inflation, political instability, high taxes. etc.) Also assume that people tend to hold 1% of their wealth in the form of gold. In that case, the relative price of gold would depend on the relative growth rates of real wealth and the physical stock of gold.
Over the past 100 years, progress in gold production has slowed. Unlike during previous centuries, most of the world has already been explored, and thus big new gold fields are much hard to find. There has been some progress in mining productivity—making it possible to extract gold from less concentrated ores—but this progress has been slower than the growth in real wealth.
Over the past 100 years, rapid economic growth in huge countries like India and China has dramatically increased the global demand for gold. Indeed these two countries now consume far more gold than the rest of the world combined. Without rapid growth in India and China, it’s quite possible that an ounce of gold would still purchase roughly one suit of clothes.
There’s a lesson here. An economic relationship can look quite reliable for an extremely long period of time, and then break down. There is no theoretical reason why the relative price of a given commodity must stay stable over long periods of time. Thus we should not rely on that outcome occurring.