Sound money vs fiat money?

[STEPHEN]

I know that sound money (backed by gold) is better than fiat money (backed by nothing). Ive been reading a lot on this subject but have not found the answer to my question. Maybe I read it but never understood. My question is why is it that sound money is more beneficial than fiat money?

 

[SpottyJ]

Gold-backed money is NOT better -- which is why every single country in the world without exception has abandoned the gold standard. That's a key point to ponder. No country on earth uses the gold standard any more. That should tell you something.

But they both have certain benefits and drawbacks. The potential problem with fiat money is that it could potentially be created in nearly infinite amounts. If so, it becomes worthless, and hyperinflation breaks out. This is a very easy problem to prevent, but a handful of undisciplined governments have caused such hyperinflation, such as Germany following WW I.

Since gold will always remain a scarce metal with some value, and it cannot be created in infinite amounts, a truly gold-backed money system won't become worthless, as long as it remains backed by gold. That is the one and only benefit of gold-backed money. But a key caveat is that any country on a gold standard will simply abandon it in when it needs to. That's the reality. A gold standard does not guarantee anything, because the gold standard can and will be suspended in time of need.

Further, it's a very bad idea to shackle the money supply to something as arbitrary as the supply of gold. That simply doesn't make any sense. A money supply needs to grow (usually) and be flexible enough to respond to circumstances, especially in times of crises. Gold standard was a key reason for the contagious nature of the Great Depression of the 1930s. The era of the gold standard was marked by many frequent depressions.

 

[Anjaree]

Sound money cannot prevent boom and bust as evidenced in England and the US in 60s and 70s.The gold price has to be manipulated and hardly be controlled by one government or central bank. Fiat money can cause boom and bust too.But it is avoidable by using sound policy and discipline. It has a good side by stimulate growth and prevent inflation.

 

[MapleWind]

i think one main benefit is that the sound money has less inflation, money printed is depend on the gold reserve one has. however, the negative side is that it limits the growth one country can achieve.