Why we need Sound Money

We have grown up in a hyperspecialised society. Every important aspect of our lives has been taken over by specialists—supposed experts who know more than us, and therefore can take important decisions on our behalf.

Ivan Illich warned us of the medicalisation of society in 1974 (Limits to Medicine); in which every significant event of our life—being born, experiencing grief, dying—has been taken over by the medical system. Not only that, it has also dominated and tried to crowd out other health systems that focus on building health and holistic treatment of disease. Thus, we saw during the Covid saga that evidence-based methods to naturally boost the immune system were deliberately silenced; and instead untested, unproven, and potentially dangerous methods were monopolistically promoted. This of course led by epidemiologists, experts with long titles who supposedly know all about human needs during “pandemics.”

Since the 1920s specialisation has also taken over money and trade. What was once a free system of careful money production based on gold reserves, and free cross-border trading, became a system in which:

• Governments controlled the production of money.
• Governments controlled cross-border trade.
• Governments attempted to interfere with the economy by manipulating money supply, interest rates etc.

The origin of Sound Money and it’s demise

Money is an amazing natural phenomenon that has evolved from the human need to exchange useful products and services, called economic goods. In these voluntary exchanges, people are happy because they come away with something they wanted. This is the principle of free trade and its medium of exchange, sound money.

What was once a money system organically developed over millennia, in which prices and value were discovered through free trade, and which everyone understood in their very bones, then became an opaque system that only specialists and governments could ostensibly understand and therefore should control.

Money is an amazing natural phenomenon that has evolved from the human need to exchange useful products and services.

If only they followed the economic principles established over those millennia! But no, just like the doctors who abandoned time-tested natural principles of health, the “new” economists abandoned sound money and classical economics for new-fangled, convoluted ideas that justified government manipulation. The charge was led by John Maynard Keynes, an arrogant sycophant who cleverly worked his way into the highest echelons of British government, and propounded an economics that “has no theory,” and that is ostensibly based on hard data and statistics. Another pseudo-science!

Thus, with no guiding theory, governments have bumbled along through successive booms and busts, while steadily building the dominance of Fiat money—a money that is no longer based on any reserve, an “easy money” that can be printed limitlessly, and that is based on endless debt that can never conceivably be repaid.

The problem of Easy Money

What is the problem with “easy money,” you might ask? After all, politicians and economists downplay the problem, giving the impression that inflation is normal and under control!

To understand the problem, you need to look at the historical origin of money. Wherever money arose in the world, it was based on a scarce resource. Money was a means of exchange that did away with the problems of barter. It was a commodity that everyone in that community understood that, if you had some money—whether it was shells, glass beads, gold, or silver—you could easily use it to buy something else.

However, we see in history that, whenever someone found a way to produce or import that money easily, and became instant “millionaires” and flooded the market with it, the money lost its value, and could no longer purchase the same amounts of goods.

The basic, universal principle here is that money must be scarce to have value. Its increase in supply must be small. For example the annual increase in global gold supply is only 1-2%; that is one of the reasons it is a “hard” money.

…money must be scarce to have value.

When you break a universal principle, you inevitably cause problems. This applies in health as well as economics.

Economic historians point to debasement of the value of money by kings, emperors, and governments as causes of the downfall of those societies—including the great Roman and Byzantine empires. In those cases the leaders minted more money than normal, diluting the gold and silver content, in order to finance wars, palaces, monuments, and other unnecessary expenses. When people found the value of their savings disappearing and the cost of living going through the roof, they rose up in revolt.

At some point in history, people found it more convenient to store their gold with goldsmiths, who then issued certificates to the customers. Eventually, the certificates were accepted as money, because any certificate holder could go back to the goldsmith and exchange it for gold. The certificates became money backed by gold reserves. As long as the goldsmith only issued money that was 100% backed by gold stores, they were solvent and were protected from any “runs, ” i.e. demands from all their paper money holders for their gold back.

Some goldsmiths became banks, which, always on the lookout for extra profits, started practising “fractional reserve” banking, that is, they started issuing more money than they had reserves. This started the practice of banks being insolvent, while hoping there were no bank runs.

Governments found that, by colluding with the banks, they could get extra cash by legalising the banks’ insolvency and counterfeit production of money. Thus, counterfeit money printing by approved institutions was legitimised. This set off a government money-printing spree in 18th century France, which ended again in the people revolting and burning the printing presses.

The formation of the Federal Reserve (a so-called bank of banks) in the US, and the start of World War One (a catastrophic war which no one can quite explain the cause of), gave the opportunity for governments to recall gold from the public, and issue extra paper money to finance the “war effort.” This set off double-digit inflation in Britain, and massive hyperinflation in Germany, which all but destroyed their economy.

The final nail on the Sound Money coffin

After World War Two, all countries agreed, at the Bretton Woods meeting, to the US Dollar as a global reserve, backed by their gold kept in US itself. Over the next decades, governments discovered this was not a satisfactory solution at all, and started claiming their gold back. Of course the US was insolvent, and president Richard Nixon defaulted on the Bretton Woods Agreement, declaring in 1971 that the US Dollar was no longer backed by gold. This cemented the dominance of Fiat currency—an easy money that is not backed by anything, and that can be printed without limit.

Fiat currency—an easy money that is not backed by anything, and that can be printed without limit.

Having abandoned the universal principles of money and economics based on normal action and transactions over all of human history, we now face an economy perilously headed for the edge of the rapids, rudderless, powerless, captained by bureaucrats and financiers with no theory.

We now have a Federal Reserve that claims to “stabilise” the economy, but appears to be cluelessly adjusting deck chairs on the Titanic. Not having learned from the history of fallen civilisations, we now have governments flooding the money supply, diluting the value of the dollar to nothing, destroying the lives of those who work hard and try to save, paradoxically driving them into more and more debt and poverty.

That is why we need to understand the basic principles and come back to sound money.