How did economy function with the gold standard still in place?


Ranging from medieval times when gold was the only currency, to modern times until the currency was pegged against the gold standard, how good/bad was the economy?
Was there any inflation? If so, how did it occur without artificial manipulation of the economy.

In: 79

>how good/bad was the economy?

Not really answerable. There were good periods and bad periods, just like today. The economy was more volatile, but that can’t be directly tied to the gold standard entirely.

>Was there any inflation?

Yes. Inflation happens in every economy, regardless of what monetary system it uses.

>If so, how did it occur without artificial manipulation of the economy.

Inflation is a natural thing in expanding economies. If demand for a good or service increases faster than the supply of that good or service can increase (as typically happens when populations grow) prices will rise as a result. This is known as demand-pull inflation.

The economy was a lot more volatile. Some other country hoarding gold could cause a depression. A new gold strike could cause inflation. Recessions were harder to get out of. Inflation was much less over long periods of time due to alternating periods of inflation and deflation.

Just to address a misconception in what you said, gold was absolutely not the only currency or even the majority currency in the middle ages. It was far more common for commodities themselves to be used as currencies. Grain in particular works very well because it lasts a long time and is quite portable.

But like others have said, back in those days economies were far more likely to suffer crashes. Largely because precious metals are not as stable as people like to believe. And this was especially true right after the new world was discovered and we started importing a hell of a lot of gold and silver.

In fact, there was a period in which the price of silver was so unstable that European countries were backing their silver currency with a far more stable commodity: tulip bulbs. And then suddenly tulip bulbs collapsed in price an all of the silver currency did with them.

When you leave a free market system alone your economy will expand naturally as productivity gains compound. evil actors may appear, like governments (kings) trying to steal private property.

Gold and silver works best as money because of its rarity and malleability.

As others have clarified, it didn’t. The gold standard was formalized in the 1870s and was generally discontinued after the 1920s.

You mention inflation, but the gold standard actually has the opposite problem: deflation. With the gold standard, the currency in an economy is tied to an amount of gold. This is to give people participating in the economy assurance that the currency is backed by something stable and valuable. However, gold is finite and as more people participate in the economy, individual units of currency backed by this gold become scarcer and more valuable. Money becoming more valuable over time is a big problem.

If I buy something for $1 and then sell it at the same *value* a year later (which is now equal to only $0.75, let’s say), I’ve lost money. Holding onto the dollar, not spending it, would’ve been the most prudent course of action. Meaning that, at a high level, the economy stagnates as no one wants to spend money when it could be worth more in the future. It’s sort of like building the effects of a recession into your economy permanently.

Edit: ELI5ed it a little more.