The concept of “sound money” – currency backed by tangible value and protected from arbitrary debasement – was once considered a cornerstone of economic liberty and prosperity. Yet today, every major currency in the world operates on a fiat basis, deriving its value not from gold or silver, but from government decree and the collective faith of its users.
This transformation, which accelerated after the collapse of the Bretton Woods system in 1971, represents one of the most significant yet least understood changes in modern economic history: the moment governments assumed control of the monetary system marked a fundamental departure from the principles of free market capitalism.
Fiat Money Isn’t Sound Money
Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system… A ‘free’ capitalism with government responsibility for money and credit has lost its innocence. Money control is the supreme and most comprehensive of all government controls short of expropriation.” – Gustav Stolper
The world we live in today is one of “fiat money”, or monies issued by central banks and government agencies that are not backed by scarcity, but rather backed by the “faith and credit” of the issuing agency. This matters because, if sound money was a response to the princely practice of debasing the coinage and intended for the protection of civil liberties, then it stands to reason that a currency not defined as “hard” could be both debased and used against civilians in attacking their liberties. In fact, debasement and depreciation of media of exchange through monetary manipulation has been the hallmark of recorded history – why would the modern era be any different?
Nineteenth century economist John Stuart Mill, in his Principles of Political Economy, wrote that debasement of a fiat currency was inevitable: “The issuers may add to it indefinitely, lowering its value and raising prices in proportion; they may, in other words, depreciate the currency without limit. Such a power, in whomsoever vested, is an intolerable evil…. The temptation to over-issue, in certain financial emergencies is so strong, that nothing is admissible which can tend, in however slight a degree, to weaken the barriers that restrain it.” And, Voltaire famously wrote that “Paper money eventually returns to its intrinsic value – zero,” as a result of currency debasement that eventually undermines the basic economic structure of society.
To that point, the purchasing power of the U.S. Dollar has fallen over time as money supply has grown, with $1 in 1913 having the same purchasing power as $26 in 2020. (see the chart below from Visual Capitalist). Money supply (M2) in the U.S. has skyrocketed over the last two decades, up from $4.6 trillion in 2000 to $19.5 trillion in 2021, with 20% of all U.S. Dollars in the money supply, $3.4 trillion, being created in 2020 alone. Considering that the U.S. Dollar lost a further 50% of its purchasing power from 2020 to 2023, it is fair to state that the U.S. Dollar is not “sound money.”
Furthermore, the full “faith and credit” of the U.S. Government is a suspect promise in light of the fact that in 2023, Fitch Ratings, one of the three major U.S. credit rating agencies, announced that it had downgraded the U.S. credit rating from AAA to AA+.
This marked only the second time that the U.S. credit rating had been dropped, with the first credit downgrade in the Nation’s history occurring in 2011 when the S&P lowered its rating from AAA to AA+. In the risk assessment, Fitch cited an erosion in standards of governance over the last twenty years, lack of planning for an aging population, expected rising general government deficits, and fiscal deterioration of the US government as reasons behind the downgrade.
Final Thoughts
The debate over fiat vs. sound money remains highly relevant in an era of unprecedented monetary expansion and experimental fiscal policies. As governments worldwide engage in massive money printing and debt accumulation, the principles of sound money offer both a critique of current practices and a roadmap for monetary reform.
Considering together the words of Hans Sennholz, “Freedom of money and freedom of banking, these are the principles that must guide our steps” and the words of F.A. Hayek, “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop,” it would seem that Bitcoin better suits the needs of the civilian populace – Bitcoin ensures protection against debasement and has been adopted without coercion.
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