Sound Money in Theory and Practice

"Let me return to the classical idea of sound money. Sound money is a rule, but of a different kind than modern monetary rules such as the Taylor Rule or NGDP targeting. Sound Money was not a rule based on empirical relationships among economic variables. It was not invented, but discovered. It is more analogous to the rule of law. Mises (1971: 414) made this point clearly. “Ideologically it [sound money] belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and bills of rights was a reaction against arbitrary rule and non-observance of old customs by kings.”

The argument for sound money is not merely a technical economic argument, but a political economy and even constitutional argument. When classical economists contended that commodity standards were a bulwark against inflation, they did not suggest that there would be no variability of inflation under a gold standard. Their own experience told them otherwise. Rather, they recognized that a gold standard was protection against arbitrary actions by sovereigns to depreciate the currency. Protection against arbitrary and capricious governmental actions is what constitutions are meant to provide."