Sound money, or hard currency, is a term referring to currency that has characteristics imbuing it with stability. This translates to reliability and resistance to dramatic fluctuations in value.
Sound money may also be characterized by its scarcity and resistance to devaluation over a long timeline. Other traits seen as imparting the qualities of sound money to a commodity are durability and portability.
Examples of Sound Money
Precious Metals
Precious metals are often considered sound since they exhibit traits like scarcity, stability, and resistance to devaluation compared with most fiat currencies. Further, they are portable and durable.
In particular, gold has been viewed as sound money for centuries. Its finite supply preserves value over time, and it is a favored asset for investors during uncertain times when the value of fiat currency fluctuates. Gold foil notes such as Goldbacks provide sound money in a highly portable and divisible form meant for use as money.
Silver shares many characteristics with gold that make it a sound investment. Although it is more volatile than gold, the intrinsic value of silver serves as a reliable store of value for investors around the globe. Its industrial applications contribute to its scarcity, although it has less value than gold by weight, which may be a concern for investors seeking high value and equal portability.
Real Estate
While real estate is certainly not an example of money or currency, it is considered sound, as it meets many of the criteria for sound money assets, despite its immobility. The inherent value of land and real estate, in addition to scarcity, ensures that they retain value. Real estate and land can also generate wealth through rental income and appreciation.
Bitcoin and Cryptocurrencies
Cryptocurrencies have gained widespread attention and notoriety, sparking conversation and debate about whether they can truly be considered sound. The limited supply and scarcity of cryptocurrency like Bitcoin foster trust in its potential for long-term value, as these facets digitally mirror aspects of precious metals.
On the other hand, some critics claim it lacks intrinsic value because it is essentially a computer code that is not backed by a sovereign state.
Are Fiat Currencies Considered Sound?
Although the U.S. dollar is not considered an example of sound money, some point to the Swiss Franc as an example. Although the Swiss Franc is not backed by a gold standard today, some may consider it sound money in comparison to other currencies. Its historic trust among investors lends credibility to this notion.
However, it is still subject to inflation despite a strong, centralized Swiss National Bank.
Why is Sound Money Important?
Sound money is important for ensuring the long-term stability of an investor’s wealth and preserving purchasing power. Despite efforts to alleviate economic hardships, true inflation can be detrimental to the purchasing power of fiat currencies.
Sound Money and the Gold Standard
Some economists see a return to the gold standard as the most effective means of controlling rapid credit expansions. The gold standard exerts this force because it limits financial institutions’ ability to issue credit.
