Abstract. An essay on the hazards of unsound money, savings behavior under unsound monetary orders, the common fallacies of modern central banking, and the prospect of digital sound money.
The choice of which money to use comes with tradeoffs and consequences. Money that is costly to create has generally served as the more reliable form of currency, since the ability to create money inexpensively destroys the wealth of savers and hence the incentive to save. Known as hard or sound money, such as those supported by a specie standard, high creation cost currencies maintain reliable mechanisms for restricting supply growth. In contrast, unsound money, or money that is easily prone to supply increases such as most government-issued money, is susceptible to rapid stock increases and wealth depreciation of current holders. The printing of unsound money has often been used to finance national spending, effectively pulling forward the future wealth of its citizens to fund the perceived needs of today. Evidence from the largest civilizations in history shows that sound money is necessary for progress and growth, and the lack of a stable monetary standard is generally associated with societal and economic destruction, such as with the collapse of the Roman Empire through its currency debasement. Digitally sound currencies such as Bitcoin may offer a solution to the historical and current problems of unsound money. At the same time, the authors must caution against the practical adoption of non-sovereign sound money, as the rapid adoption case for these new alternatives run diametrically opposed to the interests of the world’s largest sovereigns and central banking institutions who control their currency supply. However, we cannot ignore the fact that history has proven time and time again that once “sound” monetary media departs from this path via debasement, they will eventually be completely replaced by newer forms of more sound money.
Government-issued money, like primitive money and most commodity-based monetary bases, is susceptible to rapid supply increases compared to its existing stock, and therefore has the potential (at all times) to lead to a rapid loss of salability, diminishment of purchasing power, and wealth depreciation of its current holders. With the suspension of the gold standard during early 1900s wartime, governments expanded money beyond their limited gold-back treasuries, spreading the liability of future repayment out to the entire population. Money (i.e., value and, more specifically, future value) was created in order to finance wartime needs, pulling forward the future wealth of its citizens. World War I may have ended far sooner had European nations remained on the gold standard and not been able to continue their war efforts with limited treasuries through the expansion of fiat money. In a sound monetary regime, a government’s wartime expenditures are bound by the taxes it can collect and savings it has amassed over time (in the form of hard money treasury), but with an unsound monetary regime, the only constraint is how much currency a government can create before each incrementally-created unit becomes exponentially less valuable (asymptotically approaches zero). In a fiat currency regime, value can appear simply through the creation of additional money, but only for so long as the population believes this new fiat value to be temporal (whether through the future creation of actual wealth or the future promise of a currency supply contraction). The Great Depression forced nations off the gold standard, while government control and socialization of the economy under Hoover and FDR continued to exacerbate the growth of unsound money, including Executive Order 6102 signed by FDR in 1933 which forbade the ownership of gold coin, bullion, and certificates and essentially allowed the federal government to confiscate its citizens’ wealth.
Hyperinflation is an economic phenomenon unique to rapidly inflatable commodity and government-controlled money. Given that the cost of production of government-issued money is effectively zero, there remains an ever-present temptation to create currency in order to satisfy short-term consumption demand, leading to a vicious, difficult-to-reverse cycle of borrowing from the future in order to satisfy the needs of the present. Through this, it is quite possible for the wealth of a nation to disappear in a relatively short time span through hyperinflationary government activity. Hyperinflation extends beyond simply the extreme loss of a nation’s wealth; it represents a complete collapse of the economic structure, production capability, and productivity of a society. The increasing monetary supply means a continuous devaluation of the currency, expropriating value from individuals who currently own wealth (and who have amassed it over the years and generations through sound saving behavior) to those who are first to receive the new money. This transfer of wealth from savers to “new money” is known as the Cantillon Effect: inflationary policy creates wealth for a government at the expense of current savers and holders, and the immediate beneficiaries are those who receive it once the government spends it. The present and future wealth of citizens is reduced via inflationary policy, and so the income and wealth of a government is naturally reduced in the future with a decreased value of real tax receipts. In essence, inflationary policy eliminates the temporal element of future government income and wealth derived from citizen taxation by printing money and receiving it today. Whether the Cantillon Effect is a result of general inflationary policy or national emergencies that justify increased government spending to stabilize a languishing economy, the expansion of government money reduces the wealth of its current holders, decreases the incentive to save, and creates far more serious issues longer term if not managed by an ever-vigilant sovereign with an eye towards restoring the soundness of its money as quickly as possible. And, given the lack of tangible examples historically of a successful “return to sound money,” we grow increasingly concerned that, once down the path of openly borrowing from the future to pay for the present, modern societies may be practically incapable of breaking this cycle without a significant, adverse intervention.
Sound money makes societal efforts such as production, mutual cooperation, wealth accumulation, capital savings, and trade the only avenue open for fundamental prosperity rather than the creation of wealth for some through the dilution of others. The 1900s marked the transition from sound money to unsound money, backed by a government decree that denied a free market choice of monetary media and forced government-issued fiat currency into the hands of its citizens. Sound money is a key requirement of individual freedom from authoritarianism and despotism, as the coercive state’s capability to create infinite money can give it undue influence over its citizens, an influence which by its very nature can be most easily abused and attract those with suboptimal agendas.
Savings & Time Preference
Sound money is a key prerequisite for individual time preference choices, a critical and commonly ignored element of personal decision making. Time preference refers to an individual’s preference for current consumption over future consumption. Those with higher time preference are substantially focused on their well-being in the present and immediate future, while others with lower time preference place more emphasis on their well-being in the future. But this concept extends far beyond just the basic preference of the individual to consume; the economist Hoppe explains that once time preference of the individual drops low enough across a broad enough base of the population to allow for the production of widespread capital goods, it initiates the “process of civilization.” Per the original publication, the process of civilization is “a positive feedback loop where time preferences perpetually decrease due to the accumulation of capital, the increase of the relative value of future goods, the further division of labor, and lengthening of life expectancies.” The consequences of the converse, a situation in which time preferences increase enough across a broad enough base of the population, should be obvious.
Microeconomics focus on individual decisions, and the most important economic decisions any individual can make are the tradeoffs they make today with their future self. The better money can retain its value through time, the more individuals (all else being equal) are incentivized to postpone present consumption and instead dedicate capital and resources for future production, leading to higher capital accumulation and improved quality of life. In instances where money does not retain its value through time, individuals are incentivized to consume rather than save and commit capital for the future, eventually leading to suboptimal capital allocation decisions and lower aggregate wealth levels. Unsound monetary standards have profound effects on societies in the long run: society in aggregate saves less, accumulates fewer resources, and consumes its capital at a faster pace. What’s worse is that this occurs in an almost paradoxical fashion, as individuals only “see” the short-term effects of an increased ability to consume, while continuing to fuel the long-term wealth decline of the society.
Societies and economic progress thrive under a sound monetary system; this progress disintegrates when monetary systems are debased. The Roman Empire, in part, collapsed due to the debasement of the Roman silver currency, the denarius. Trade was vital to Rome and generated the vast majority of the wealth of Roman citizens, allowing the capital to pay for the administration, logistics, military, and control of its 130 million people over 1.5 million square miles. In order to finance present spending, the denarius, originally comprised of 4.5 grams of pure silver, was debased by reducing the coin’s silver content from 90% to 50% (the economic equivalent of printing additional fiat currency today). Throughout the 2nd and 3rd century, the currency was continually inflated; eventually, the silver content was reduced to just 0.5%, the equivalent of having increased the supply of the denarius by 180x. The denarius currency debasement did not increase prosperity as it was initially intended; rather, it continually transferred saved wealth away from the people to the future dream of continued imperial expansion and made everyday commerce and labor increasingly challenged. With soaring logistical and administrative costs, particularly with financing the Roman Empire’s military efforts, Romans levied higher taxes on the citizens of the Empire, eventually leading to hyperinflation, a fractured economy, localization of trade, a financial crisis, and return to inefficient barter methods. Similar dynamics can be studied across the fall of the Byzantine empire and the modern-day struggles of European societies.
Unsound money controlled by central banks, whose express task is to keep inflation positive, adds potential real (and increasingly) adverse incentives for individuals to save. Only returns that are higher than the rate of inflation of the currency are positive in real terms, creating incentives for higher-return but higher-risk investment and accelerated spending. Savings rates on average have declined alarmingly across developed nations in the twentieth century, particularly after the suspension of the gold standard (Fig. 1). Meanwhile, household, municipal, and national debts have increased to considerably elevated levels. Sound money, on the other hand, has stable value and gains relative to other unsound money over time.
Fig. 1: US Personal Saving Rate, Seasonally Adjusted. 
Keynesian high time preference thinking with abstained saving and urging of consumption as the key to economic prosperity has transformed capitalism, a system originally based on saving and capital accumulation, into a system of immediate gratification and consumption. Long term economic growth is unavoidably driven by delayed gratification, saving, and capital investment, thereby extending the production cycle and increasing the productivity of production. The transition from sound money to unsound money has led to wealth depreciation, a significant increase in consumption, and indebtedness as the commonplace method for funding such consumption.