The Qualities of the Monetary Base Essential to Sound Money: Fiat and Gold

Abstract

Sound money should have at its base a group of non-interest-bearing assets which have the quality of such extreme moneyness and are in such restricted supply that individuals in aggregate are willing to hold (directly or indirectly) large amounts even when other monetary assets outside the monetary base yield substantial interest income. These conditions were fulfilled historically under the pre–First World War international gold standard. They should hold also for the hypothetical creation in the present or future of sound money, whether fiat or gold. By contrast, under the actual monetary regime, with its banner standard target of 2 percent inflation, the monetary base has become severely corrupted: extreme moneyness has eroded, and individuals derive no utility from it at the margin of holdings. The nature of the route from here to there—from a corrupted monetary base to one suitable for sound money—is the final subject of the present article.