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What is ‘sound money’?

Sound money is a term used to refer to money that is backed by a tangible asset such as gold or silver. By contrast ‘paper money’ which makes up t...

14 April 2021

Martin Cozens

Sound money is a term used to refer to money that is backed by a tangible asset such as gold or silver. By contrast ‘paper money’ which makes up the majority of currencies, is backed only by government decree, or ‘fiat’. A legitimate criticism of a fiat currency is that it will always devalue, via inflation, to return to the inherent value of the paper it is printed on and nothing else.

Were the same thing to happen to sound money, it would still have considerable value because the gold or silver which makes it up is valuable. This is why the origin of currency is synonymous with gold – it was the best holder of value for exchange.

Back in the day, biting a gold coin was a quick way to check for teeth marks, indicating a lead alloy – a forgery, rather than the sound, gold money you would expect.

Back in the day, biting a gold coin was a quick way to check for teeth marks, indicating a lead alloy – a forgery, rather than the sound, gold money you would expect.

Paper money is essentially an IOU – its value is based on debt rather than the value of the metal which backs it up. Sound money is valuable because gold is valuable. Traditionally, sound money came in physical coins but in the digital age you can now spend physical gold as money anywhere in the world.

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