Sound Currency
We need sound currency, but not necessarily gold or silver.
I want to take a moment to talk about sound money/currency. Sound money is money that is not prone to a sudden appreciation or depreciation in value over the long term. Traditionally, money that has “intrinsic” or use-value, such as gold or silver is regarded as sound money. The idea of sound money arose because people were unhappy with their governments meddling with the currency. History is rife with examples of governments and banks debasing the coinage, as happened in Ancient Rome for example. Coins started off as pure silver but were gradually debased by mixing in other metals until the silver content was only a small percentage. In a society where people expected their money to have real value, this was problematic.
The Status Quo: Gold and Silver
Today, people who advocate sound money generally want a return to a gold or silver standard. In this case gold or silver certificates are issued for gold or silver held by banks. However, the truth is that just as governments of old debased their gold and silver coins by reducing the percentage of gold or silver in the coins, banks also debase gold and silver standard currencies by increasing the ratio of the amount of certificates in circulation to the actual amount of gold or silver that the bank has in store. Obviously, most people get comfortable with leaving their gold or silver in the banks, and the banks realise that they can issue more certificates than the actual amount of gold or silver that they have.
Sound money advocacy arose because of a mistrust of government. But it is not just about the government but also a mistrust of the banks. Advocates of sound money believe that by having laws that keep the value of money tied to some commodity such as gold, they would be able to keep government in check. But history will disagree. Governments and banks will always debase the currency if they have the slightest opportunity to do so.
While gold and silver have been discovered by the market as sound money, there are other examples of commodities used as money, such as salt. Not everyone accepts that gold for example should be used as currency, so imposing a gold standard on everyone makes it a fiat currency as we have defined previously. Some people also propose tying the value of money to a basket of commodities. The idea here is that the average price of the commodities will be more stable than just the price of a single commodity.
I note again the definition of sound money, i.e., money that is not prone to sudden change in value over the long term. The reason why precious metals such as gold and silver are favoured by sound money advocates is that their exchange ratios to other commodities remain relatively stable. With only a few exceptions, you will find that the amount of gold that purchases a given good or service does not change by much. It does change though during major economic events such as recessions or high inflation.
Is There an Alternative?
Do we really need sound money to have intrinsic value? The answer is no. Sound money is about having stability in purchasing power, and not about intrinsic value. Gold and silver as money are relatively stable but they do have their own problems. Government and banks will debase them at the first opportunity they get. I also do not like that fact that in the modern currency system, using gold or silver to back the currency requires that tons of the metal be stored in a vault. Even in the case of ancient times, the fact that gold and silver coins were being used does not entirely appeal to me. I believe that the free market is efficient in finding the highest value use cases for all resources in the economy. I therefore find it hard to accept that that best use case for gold or silver is to have it sitting in a vault, or to just be passed around as coins without actually using it for anything.
I believe having sound money is desirable. I believe that until now currency in specie form such as gold or silver has been our best shot at having sound money. But tying the value of currency to a commodity has its problems. A shortage or glut in the commodity will cause a sudden appreciation or depreciation of the currency. It can also be debased by the government and the banks. Our target therefore should be to find a currency that doesn’t have the shortcomings of a gold or silver standard but is still sound money. This is precisely the kind of currency I will be presenting in future articles. An alternative to both the unbacked fiat currency system we have now and the gold standard of old, but still remains sound money.
