Sound money

What is sound money?

It's not the ten-Dollar bill or the ten-Pound note (or any other fiat currency) sitting in your piggy-bank.

The best definition of sound money is money that reliably holds its value. In other words it's money that can't easily be debased, inflated away or manipulated. That's why Bitcoin was invented - to give people a form of currency beyond the control of governments and central banks. Trouble is, cryptocurrencies can be manipulated in many ways - and they are pretty useless as a medium of exchange.

Yet centuries before cryptocurrency (of which the UK's Financial Conduct Authority says there are today, confusingly, more than 20,000 types) there was a form of currency existed that resisted manipulation. A gold coin minted in Rome retained its purchasing power across centuries, in a way that no paper currency in history has managed. Gold (and silver) coins had the qualities required by sound money - scarcity, durability, divisibility, portability. They were made from something that was scarce in nature. That quality gave them an inherent defense against rulers who wanted to spend more than they possessed. All rulers, whether democratic or autocratic, seek to do that.

Sound money puts handcuffs on government. If a government can only spend what it can raise in taxes or borrow from willing lenders, it imposes a necessary restraint. But if it can create new money, the metal of those handcuffs turns to water.

The gold standard

The main use of the gold standard was its structural suppression of inflation - governments which adhered to the gold standard could not print more money than the gold they held. That kept them honest, in monetary terms at least. While the gold standard lasted prices were broadly stable. Britain operated its gold standard between 1717 and 1931. In 1850 one Pound bought roughly what it had in 1750.

President Nixon removed America's own gold standard in 1971. Arguments over the gold standard have raged since then. Proponents point to the innate resistance of gold to manipulation. Opponents of the gold standard justifiably argue that when economies contract, governments need to be able to create money to support jobs, incomes and investments - to get the economy moving again. That argument is why central banks tend to favor a small amount of annual inflation - 2% in Britain's and America's case.

Inflation is a perpetual demon

But some governments are untrustworthy, some are incompetent. Printing fiat money can get out of hand. After WW2 Hungary's economy was desolate. The government printed money to stimulate the economy, but it failed to control the printing presses. In 1945-46 prices were doubling every 15 hours.

After 1971 the world moved to a system of fiat currencies - which is money backed by nothing more than trust in the governments that issue the bills and coins you use.

We have experienced higher than expected inflation again recently, thanks first to Covid-19, then the Ukraine conflict. Covid prompted governments to behave like a drunk Santa Claus, printing trillions of fiat notes and handing them out to everyone, good or bad.

Inflation is devastating to those who have no protection, people who don't have assets that appreciate in nominal terms. Those who have real assets such as property, equities, commodities, which rise with inflation, are more fortunate. Unsound money, fiat money, tends to transfer wealth upwards - from savers to borrowers, from the prudent to the leveraged.

Sound money is not merely a technical term. It's an ocean, full of morally important waves. Ultimately it speaks about the trust we have in our government to do sensible things. A society with sound money is one where a promise to pay debts lasts for decades. A society without sound money is one where that promise is continuously and quietly undermined.

We are all about to face yet another burst of higher inflation, thanks to the war in Iran. From the average price of petrol in the US now exceeding $4/gallon, up around 34% in a month, to heating oil in the UK up some 200% over the same period, higher prices have arrived. For the moment the UK government is trying to avoid spending money it doesn't have on supporting consumers in the face of this imminent inflation. Higher road transport fuel will push up the price of many of the commodities transported - around 90% of the total - across the US. The Bank of America estimates that about 24% of US households spend 95%+ of their income on necessities, with little spare. Money is now tight, everywhere.

Sound money is more essential today than ever. That's why Glint is so important; you can save and spend the soundest money we have ever had.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debt card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.