What is Sound Money?
Sound Money, unlike fiat money, maintains its purchasing power and has an intrinsic value. In simple terms, sound money can purchase the same quantity of products twenty years before and now. The main reason for this is the cut out of centralized bodies like central banks and governments that control the supply of money.
Sound money is pegged to a good or commodity to maintain the stability of price. For example during the gold standard eras in the United States, the US Dollar was pegged to gold. The price of the dollar was set to a fixed price for gold and could buy and sell gold at that price. The Gold standard occurred during the during five periods from 1792 to 1862, from 1987 to 1933 which followed until 1971 partially.
Sound Money avoids the evils of inflation, and deflation and promotes a more stable monetary environment. During the U.S Gold standard, inflation was avoided.
Nowadays America holds a fiat monetary standard.
Sound money is hard money as it cannot be changed easily unlike fiat currency which can easily be created.
Printing of Money
According to the economic theory of demand and supply in regards to money supply, when the supply of money increases the value of the currency falls. If the supply of money decreases the value of the currency rises.
Fiat currencies these days have the ability to increase in supply by the printing of notes by governmental institutions or central banks. Many governments do this to boost economic growth. In 2008 Zimbabwe faced a high government debt and falling output which led to printing money in huge amounts. The printing of money led to an estimated hyperinflation of 79,600,000,000% in November 2008, which meant a daily inflation rate of a mind-boggling 98%.
Why Sound Money is Safer?
Many times the monetary authorities tend to increase the money supply to help fuel economic growth. However, the sustainability may not last as long as seen in countries where the expansion turns into recession. Thus money which cannot be controlled which can be clarified as sound money is easily is in a better position to keep the economy safe and sound. A hyperinflation situation like Zimbabwe can cause any country’s fiat to lose value, however, if sound money was used there is no chance of a government trying to correct economic issues leading to hyperinflation.
Why Bitcoin is Sound Money?
Bitcoin is also known as Digital gold given the limited supply. With Bitcoin having a supply limit of 21 million it justifies that the limit is known to establish value in itself. Thus it can be considered sound money.
Sound money is hard money as it’s difficult to accumulate. Bitcoin falls under this category as it’s difficult to mine due to the complicated algorithms that need to be solved along with the expensive mining equipment required.
Bitcoin is efficient thanks to the accounting system based on the open ledger, which allows users around the world to send and receive money using a simple address. There are no legalities bound to it, which makes it as efficient as ever.
Unlike the fiat monetary system, Bitcoin has no third party like the central bank, insurance companies or governments involved in a transfer. Thus the fact that Bitcoin is decentralized means that the Bitcoin code is the real value of Bitcoin which almost is a futuristic version of sound money.
Why Sound Money is Important?
With no central body controlling sound money, it makes it easier for capital accumulation. As a result, there are more productive activities leading to more efficient ways of producing goods and services.
Inflating or deflating the money supply has no benefit to society as a whole, but plays on redistributing wealth. Inflation benefits debtors, while savers are hurt and deflation results in savers benefiting while debtors are hurt. As a result, there is no net gain!
President Herbert Hoover’s statement in 1933 to Franklin D. Roosevelt proved why Gold like Bitcoin is needed when he said, “We have gold because we cannot trust governments.” Gold is a unique asset that has paved its own supply and demand with a stability as a source of wealth, pretty similar to how Bitcoin is following its footsteps. With detrimental effects to the economy in today’s world thanks to manipulation by centralized authorities it’s time Bitcoin helps fix the artificial changes of the value of money in general.