Sound Money

People argue about gold and paper money with a handful of words, and they rarely mean the same thing by them. One person says “backed” and means a note you can swap for metal at a bank counter. Another means gold sitting in a central-bank vault that nobody can ask for. Until the words are pinned down, the argument goes in circles.

The oldest of those words names money the issuer cannot simply create more of. For most of history the limit was the metal: an ounce of gold takes real work to dig out and refine. Later the limit was a statute, when a paper note could be exchanged for a fixed weight of gold or silver. Ask whether the issuer can add to the supply by decision alone, and most of the other questions sort themselves out.

Money nobody can simply make more of

A banknote that pays for groceries on Monday works as money today. It says nothing about next week. Sound money is that gap: a currency accepted everywhere can still lose value if whoever issues it is free to expand the supply.

The English is old. A sound coin rang true when dropped on a counter. A clipped or plated coin gave a dull note. Merchants tested coins that way because forgers, and sometimes rulers, shaved off metal. The worry has always been a coin worth less than it claims.

Mined, or made by law

Hard money vs fiat is a question of cost. Gold has to be mined, and no vote adds an ounce to the world’s stock. Fiat money exists because a government says so and people keep accepting it. The word is Latin for “let it be done.” A treasury can issue a new note with a signature.

Some fiat currencies have held steady for years. Roman emperors had cut the silver in the denarius to a few percent by the 270s AD. The same note can also change category overnight. When the United States stopped exchanging dollars for gold in August 1971, the notes in people’s wallets looked exactly as before. Only the law stood behind them.

What money buys over the years

Inflation and purchasing power is the loss in ordinary terms: how much bread or rent an hour of work pays for, across decades. Rising prices are what people notice. The change is in the currency. Hyperinflation is the extreme. The economist Phillip Cagan drew the line in 1956 at prices rising by half or more in a single month.

Prices also rise for reasons that have nothing to do with the unit, such as war, drought, or a failed harvest. A hard unit cannot stop a harvest from failing. What it removes is an issuer adding to the supply whenever the budget runs short.

Gold in the vault, or gold you can claim

No word in these arguments gets stretched further than “backed.” Backed money separates the two uses. A note is redeemable if you can hand it in and receive a known weight of metal. Gold in a vault that no holder has a right to claim is something else. Redeemability can be tested at a bank window. A slogan cannot.

Governments hold gold for many reasons, and holding it does not make their notes convertible. Only the law does that, by giving the holder the right to ask. In the twentieth century that right was taken away in stages. Most of Europe’s warring governments suspended it in 1914. Franklin Roosevelt’s Executive Order 6102 told Americans to hand in their gold coin in 1933. Richard Nixon stopped exchanging dollars for gold with foreign governments in 1971. Washington kept the gold. The US Treasury still reports about 261 million troy ounces.

Where the words were tested

In November 1923 one US dollar cost 4.2 trillion German paper marks. In 1933 Americans turned in their gold coin at $20.67 an ounce, and a year later Washington revalued gold at $35. On 15 August 1971 the last official link between the dollar and gold was cut. Sound Money History tells each of these stories with the laws and the numbers.

Two questions explain most of what happened. Who could create more money? And could a holder still walk into a bank with a note and walk out with metal?