Sound money still means today what it meant in the nineteenth century: the gold standard.

The eminence of the gold standard consists in the fact that it makes the determination of the monetary unit’s purchasing power independent of the measures of governments. It wrests from the hands of the “economic tsars” their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefited by bounties from the seemingly inexhaustible government purse.

When compared with conditions in the United States or in Switzerland, Ruritania appears a poor country. The average income of a Ruritanian is below the average income of an American or a Swiss.

With Washington politicians and Wall Street pundits the problem of a return to the gold standard is taboo. Only imbecile or ignorant people, say the professorial and journalistic apologists of inflation, can nurture such an absurd idea.

Some advocates of a return to the gold standard disagree on an important point with the scheme designed in the preceding section. In the opinion of these dissenters there is no reason to deviate from the gold price of $35 per ounce as decreed in 1934. This rate, they assert, is the legal parity, and it would be iniquitous to devalue the dollar in relation to it.

The mark of all the varieties of the gold standard and the gold-exchange standard as they existed on the eve of World War I was the gold parity of the country’s monetary unit, precisely determined by a duly promulgated law. It was understood that this parity would never be changed. In virtue of the parity law the unit of the national currency system was practically a definite quantity of the metal gold. It was of no consequence whether or not banknotes had been endowed with legal-tender power.

The flexible standard, a development of the period between World War I and World War II, originated from the gold-exchange standard. Its characteristic features are:

1. The domestic standard’s parity as against gold and foreign exchange is not fixed by a law but simply by the government agency entrusted with the conduct of monetary affairs.

If the government practices restraint in the issuance of additional amounts of its credit or fiat money and if public opinion assumes that the inflationary policy will be stopped altogether in a not too distant future, an inflationary currency system can prevail for a series of years. The country experiences all the effects resulting from a currency the unit of which vacillates in exchange value as against the international gold standard. With regard to these effects the freely vacillating currency may be called a bad currency.

The illusive standard is based on a falsehood. The government decrees that there exists a parity between the domestic currency and gold or foreign exchange. It is fully aware of the fact that on the market there prevail exchange ratios lower than the illusory parity it is pleased to ordain. It knows that nothing is done to make the illusory parity an effective parity. It knows that there is no convertibility. But it clings to its pretense and forbids transactions at a ratio deviating from its fictitious exchange rate.

The principle of sound money that guided nineteenth-century monetary doctrines and policies was a product of classical political economy. It was an essential part of the liberal program as developed by eighteenth-century social philosophy and propagated in the following century by the most influential political parties of Europe and America.

The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money.