What is Sound Money?

by David Gerlitz on September 20, 2011

Sound money is the concept of the Government balancing it’s budget over the business cycle. The business cycle is typically represented as one year.

What is sound money?In Austrian economics, sound money is tied to a commodity money regime, such as the gold standard. When used this way, Government spending is limited by the amount of gold in the world (and held by the Government) which prevents runaway spending and inflation.

In a fiat money regime (absent the gold standard), there is no such limitation. Governments are operationally unconstrained in their spending, so political, social and ideological constraints are placed upon Governments to prevent profligate spending.

Nearly all modern Governments profess a goal toward sound money. In addition, nearly all economists, conservative and progressive alike, profess sound money principles to be a natural law of economics.

Very few Governments actually achieve it in practice. The reason for this is simple: a growing economy requires a growing supply of money. The only other way for the money supply to grow is for entrepreneurs to spend bank credit. When sound money principles are put into use, recession, depression and volatile business cycles are the result.

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