Silver and Gold have acted as a medium of exchange for thousands of years. However, in the 18th century, silver, gold, and other metal-based money had been largely replaced by paper-based money because of the governments’ inability to regulate the flow of gold and silver-based sound money in the market. In addition to this, as silver and gold are high in value, it created a challenge of exchanging cheap day-to-day commodities with these precious metal coins. 

These reasons, when combined with others, forced the governments of different countries to introduce fiat money so that they could regulate the flow of money in the market and cut down on the hassle of carrying such heavy metal coins as sound money around the market to buy basic domestic commodities. However, people have still been arguing about the pros of sound money over fiat money or paper-based currency. But what exactly it is and how does it differ from fiat currency? Let’s understand this and see if gold and silver are sound money. 

What is Sound Money?

Sound money refers to the type of money which has some kind of tangible physical asset backing them up. This type of money doesn’t depreciate in value over a long period of time in comparison to fiat or paper money that the government backs up. Therefore, this money suffers the consequences of increasing inflation rates. Sound money, unlike paper money, never decreases in value because they represent assets whose quality doesn’t degrade over time, nor do their prices. 

Features of Sound Money

There are several features of sound money that make it better than fiat money and hence, are known to have a long history of use. Some of these features are given below.

• The purchasing power of sound money doesn’t decrease with time as in the case of paper-based money.
• Sound money is a stable unit of account and an effective medium of exchange, especially for businesspersons, and entrepreneurs.
• The purchasing power of sound money has nothing to do with any government policies or political parties. Instead of this, its purchasing power is decided by its market value, its demand, and supply in the market. 
• Sound money preserves the real value of financial claims with predefined nominal amounts.
• It creates trust and security among the holders of sound money and improves social harmony, leading to the establishment of a modern economy. 
• Sound money faces no dangerous consequences of inflation or deflation as in the case of fiat money which witness large appreciation and depreciation in its value with the changing inflation rates.

Is Silver and Gold Sound Money?

Yes, Gold and Silver are sound money as these precious metals qualify all the criteria. Here’s how gold and silver are sound money.

Globally Accepted

Gold and silver are available in all the countries around the world and have acted as a medium of exchange before The Great Depression and World Wars. Even today, they can be used in exchange for cross-border payments. The very famous Gold Standard and Silver Standard are examples where gold and silver were globally accepted as a medium of exchange.

No Effect of Inflation or Deflation

Gold and silver are precious metals and they do not face any bad consequences of positive or negative inflation rates. If anything, they provide a hedge to the investors against turbulent market times. In contrast, the purchasing power of paper money reduces with the rising inflation rates, making it hard for people to meet their daily expenses. 

Don’t Degrade in Value

Gold and silver have an impressive history of increasing in value over time. For example, in the year 2010, the cost of 10 grams of gold was Rs. 18,500 whereas the cost of gold in 2022 has spiked over to Rs. 48,200. Similarly, the cost of 1 kilogram of silver in 2010 was Rs. 27,255 whereas today, it is Rs. 64,300. On the other hand, the value of paper money always decreases over time.

Purchasing Power Increases

As we can see in the example given above, the purchasing power of gold and silver increases over time because of the increase in their value. It is because more people invest in gold and silver to hedge their portfolios during rough market times. With the increase in demand, the price of these precious metals also increases. 

Trusted by People

People barely trust paper money because there are so many risks in holding paper currency. Let’s take an example of demonetization in India that happened on November 8, 2016, and banned the denominations of Rs. 500 and Rs. 1000 overnight. The value of notes of these denominations turned to the value of normal paper overnight. Therefore, people trust gold and silver as the governments can never put a ban on them. 

Provide Financial Security

Gold and silver act as sound money as they provide financial security to the people. They appreciate in value and provide a perfect hedge against many factors. These factors include dropping interest rates, rising geopolitical tensions around the world, changing government policies, and so on. These factors have a negative impact on other financial assets like fiat money, stocks, cryptocurrencies, and other savings like fixed deposits and recurring deposits. In such times, gold and silver have performed well and provided financial security to the people. 

Conclusion

With the slow collapse of fiat money, the sound money, that is gold and silver, can make a huge comeback in the world economy after going through a series of improvements regarding their drawbacks in the past. Sound money will be changing the economic scenario of the world along with digital payment methods and several companies beginning to sell digital gold and silver. There are many companies selling digital gold and silver that are also allowing users to make payments using their digital gold and silver assets present in their wallets. Therefore, we can sure see the historical medium of exchange coming back in the picture of new-age digital currency and payments.