It’s an old historian’s saying that sound money and morals are intimately connected: that when the sovereign debases the currency, the public morals also become debauched. Which one causes the other might not be a terribly important question to tease out, but nonetheless, I would like to reason out why this must be.
Sound money is of a common weight. It contains as much valuable material as it says that it does. It is held as something worthy of trust, even internationally, without the need to refer to any treaties or legal statutes. It is what it is, and what it is can be objectively assayed.
The idiom is used because a common coin makes a certain, distinct sound when struck, identical to that of its sister-coins, so that when you drop one, she sings the same tune as her siblings.
Money is a tool of calculation used in trade. When we make calculations, it is better that they be accurate than they be inaccurate, because we use those calculations to inform our economic decisions. Should we buy a pound of butter today, or wait until tomorrow? What is the price of butter? What is impacting the price of butter? When the currency is a stable unit, these questions become solely about the unit in question, rather than complex monetary matters.
When we use imprecise units in calculation, we must harm the quality of our calculations, and thereby harm the quality of our decision-making processes. It harms our ability to coordinate with the surrounding society in a way that consistently produces positive-sum exchanges .
A currency of fluctuating character, in which what the unit is changes by the day or by the hour, makes it so that economic relationships past the immediate circle of trust are continually not as they seem to be. Further, trades can subjectively appear to be ‘bad trades’ after the fact due to monetary fluctuations that had nothing to do with the trustworthiness of either trading partner.
This becomes especially obvious in our modern foreign exchange market, in which companies that do not hedge effectively can suffer enormous costs that had nothing to do with anything besides purely monetary-financial fluctuations, which do not occur in a sound money international system.
The other major issue with a fluctuating monetary standard is that it adds risk to the accumulation of savings. It systematically punishes prudence and future-orientation in order to encourage the frequency of exchanges in the economy.
Exchanges with high frequency do not necessarily result in better quality trades when assessed over the long term.
When we think about this in the most basic terms — that of a person thinking over a significant purchase — it’s possible to conjecture that most purchases that are well-researched are more likely to result in trades that both parties believe were good. When both parties spend time determining one another’s interests, when both understand the terms of the trade, and understand the alternatives, the risk involved in the exchange decreases.
Soft money systems, especially those involving a currency that’s rapidly depreciating, creates incentives for people to make many poorly-considered purchases instead. They purchase items on ‘impulse’ that may not be especially durable, that may not meet their requirements or desires, that may be at the wrong price.
However, when a state earns money from each transaction through a sales tax, its members will have a strong desire to encourage these frequently-made, ill-considered consumer purchases. When there is an income tax, the state will want to encourage people to work for their entire lives, spending imprudently, because it can tax both of those more effectively than it can tax savings and investments, especially when those investments result in the accumulation of physical capital equipment, antiques, relics, or hoards which can be unwieldy to seize.
While a sound currency is a means of encouraging prudence throughout a society, its opposite encourages graft and impulsiveness. Which aspect encourages the other is less relevant than making the traditional argument in favor of prudence and foresight in all things.