Sound Money Vs. Fiat Currency: Trade And Credit Are The Wild Cards

In traditional economies in which gold and silver are money, credit was generally limited to commerce, as credit based on loaning surpluses of gold and silver was limited by the scarcity of those metals.

In an economy in which gold is the only money, credit is limited to a percentage of gold held in reserves, as much of the reserves must be held to fund customer redemptions / withdrawals.

In a fractional reserve banking system such as ours, one ounce of gold held in reserve is sufficient collateral for a loan 10 times the value of the reserve: $2,300 in gold enables the issuance of $23,000 in new money, i.e. a loan of $23,000, as every loan is new money created by the act of issuance.

What happens to "Gold-backed money" when credit expands the supply of money expands 10-fold? The gold reserves are now spread over a much larger sum of money.

If credit is limited to surplus gold/silver loaned at interest, the sum of credit is a tiny fraction of all money in circulation.

When the empire's silver mines in Spain were depleted, the supply of new money dried up and scarcity forced authorities to shave the actual silver content of coinage, the older higher-value coinage was quickly hoarded and left circulation: this is Gresham's law, that bad money drives good money out of circulation.

That's what happens to "Sound money" when trade deficits cannot be controlled: those running the trade deficits run out of gold-silver and cease importing goods.

What is often overlooked in discussions of money is the necessity for reserve currencies to be "Exported" to the global economy at scale so there's enough units floating around to fund commerce and credit.

Fiat currencies arose to escape the limitations of "Sound money" generated by credit and trade.

We need to start thinking outside the current system, which has no solutions: debt-free money leads to billion-dollar bills, "Sound money" ends up in the hands of the wealthy and borrowing money into existence leads to stagnation as soaring interest sucks the economy dry.

https://charleshughsmith.blogspot.com/2024/04/sound-money-vs-fiat-currency-trade-and.html