What Is Sound Money, And Why Is It So Important?

If we want to build a high-trust society, incentivize long-term thinking, and ensure that hard work is rewarded, sound money is essential.

What is ‘Sound Money’?

Why does it matter?

It’s a question we have to ask, especially with CPC leadership frontrunner Pierre Poilievre making sound money a key focus of his campaign.

The basic idea behind sound money is that it is money which is protected from manipulation and cannot be easily debased.

Here’s how the Merriam-Webster dictionary describes it:

: money not liable to sudden appreciation or depreciation in value : stable money
specifically : a currency based on or redeemable in gold

Regarding sound money, respected Austrian economist Ludwig Von Mises said, “The principle of soundness meant that the standard coins — i.e., those to which unlimited legal tender power was assigned by the laws — should be properly assayed and stamped bars of bullion coined in such a way as to make the detection of clipping, abrasion, and counterfeiting easy. To the government’s stamp no function was attributed other than to certify the weight and fineness of the metal contained.”

The Swiss National Banka central bank known for a commitment to sound money (at least compared with many other central banks) – discusses how central bank money can be sound:

“Central bank money is sound when the paper money system is supported by three mainstays: a central bank mandate focused on price stability, the independence of the central bank, and solid state finances. Central bank money that retains its value is a prerequisite for sound bank deposits. Furthermore, banks must be solvent and liquid at all times and structure their business models accordingly. In Switzerland, central bank money and bank deposits are sound money. The marked expansion in the monetary base in recent years does not pose a threat to currency stability because the SNB has simply reacted to rising demand for Swiss francs. Had it not acted, price levels would have dropped significantly, the Swiss franc would have appreciated even more, and economic activity would have declined.”

While the obsession with avoiding deflation at all costs is unsustainable given the forces of technological change, that is a conversation for another time.

Many central banks expanded the money supply, but to get a sense of how much of an outlier the Bank of Canada was in terms of the rate of expansion, consider the chart below:

Bank of Canada

Those inflationary policies have consequences.

Canada’s inflation rate is 6.7%.

Meanwhile, the inflation rate in Switzerland is 2.4%.

When looking at the ‘three mainstays’ mentioned by the Swiss National Bank, you can see the trouble Canada is facing. While the Bank of Canada claims to support price stability (2% inflation target), there are growing questions about the independence of the central bank as they continue to enable Justin Trudeau’s massive budget deficits, which of course leads into the third point.

Canada’s state finances are anything but solid, and with the combination of surging inflation and economic stagnation, the prospects for actual productivity growth are moribund.

The value of our money is being manipulated, and this is not only causing economic damage, but social damage as well.

Consider what John Maynard Keynes wrote about Lenin’s claim on destroying the capitalist system through inflation:

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

It’s no coincidence that statist politicians and those who – like Justin Trudeau – have expressed admiration for Communist dictatorships, are so willing to debase our currency.

This is causing a surge in anger and political polarization, breaking the bonds of trust that are necessary for a functioning society, and robbing people of their ability to make long-term financial decisions. It also rewards those who can be first to get their hands on newly created fiat currency, rather than those who work hard.

A successful society must be built upon sound money

With all of this in mind, we can begin to see why sound money is so important, and how Canada is suffering from its absence.

Whether it’s through more Canadians voluntarily using Bitcoin, a central bank that is accountable and committed to price stability, and a federal government that returns to fiscal restraint, Canada will sooner or later have to return to sound money in order to preserve and build upon the wealth built up over previous generations.

This is why – contrary to claims about ‘populism’ or ‘simplistic’ messages – Pierre Poilievre’s advocacy of sound money is actually a principled and necessary stance in defense of a vision of Canada that is peaceful, prosperous, and sustainable.

Spencer Fernando

Photo – YouTube

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