Sound Money

Abstract

Curiously enough, this is not an established term of art in economic debate (it rarely appears in the indexes of monetary treatises), but it certainly stands for an enduring idea, frequently also described by some such term as stable money or monetary stability. As these latter labels more obviously imply, the general doctrine underlying the idea is that the monetary system should be prevented from acting as an independent source, or from magnifying non-monetary sources, of instability in the economy. Numerous specific criteria of stability, however, have been proposed. Most commonly, perhaps, writers have focused upon stability in the value of the currency unit – but it is necessary to divide such approaches into those emphasizing, respectively, the external value (the command over some specific quantum of precious metal(s), or of foreign currency), and the internal value (the reciprocal of some general domestic price level). At particular periods, the focus has commonly shifted to the prevention of liquidity crises, calling for an adequate degree of ‘elasticity of the currency’, that is to say an elastic supply of legal tender, implying typically some course of central bank action resulting, if not in stability of interest rates, at least in markedly reduced instability of short-term rates. Keynesian economics tended to shift the focus still further from stability in the money unit towards stability in the economy, notably to levels of activity and employment. In this, however, it had been substantially anticipated over a century earlier by the ‘real bills doctrine’ which had implied the possibility for the supply of credit adequately to be limited to meeting what were then called ‘the needs of trade’.