For money to be a generally accepted medium of exchange, it must be possible to use it to buy goods or services not only today, but also tomorrow, and the day after, and so on. Money can therefore also be used as a store of value. However, money is not the only means of holding and growing wealth, and it is often not the most profitable. Although it does offer security and flexibility, unlike risky financial investments it generates little or no return. So what constitutes sound money? My answer is unlikely to come as a surprise: money is sound if it fulfils its functions as well as possible. And this depends on its value being stable. Only if this is the case will it be broadly accepted as a medium of exchange over the long term. Furthermore, as a unit of account, money that is stable in value makes it possible and easier to plan and calculate, and it is also suitable as a store of value. However, the importance of money that retains its value goes far beyond these three narrowly defined functions. Sound money contributes to preserving the real value of financial claims with fixed nominal amounts, such as savings deposits, bonds, employment contracts and pensions. It thus creates security and trust, which in turn promotes social harmony and cohesion. Money is therefore sound if it neither depreciates nor appreciates, i.e. if there is neither inflation nor deflation. But how can we measure the development of the value of money over time?
However, there are also many examples from history where paper money proved to be decidedly bad, as high inflation led to a rapid erosion of value with disastrous consequences in some instances for the economy, society and politics. The flexibility that is the defining feature of the paper money system is both its strength and its Achilles heel. Used properly, i.e. with the focus on the goal of value retention, this flexibility can contribute to the stability of economic development and the solidity of the banking system. However, things start to get dangerous when it is misused to solve political or structural problems by issuing central bank money – as advocated by the proponents of the aforementioned modern monetary theory, for example. The temptation to fulfil such wishes via the printing presses, by creating money out of thin air, is of course all the greater the more politicised monetary policy becomes. 8 The solidity of a paper money system therefore lies in three mainstays: a clear mandate for the central bank, setting as its target the preservation of price stability and thus ensuring sound money; protection from political influence by enshrining the independence of the central bank in law and actually putting this into practice; and healthy state finances. After all, experience shows that high government deficits mean increased political pressure on the central bank, and in cases where monetary policy has been politicised, there is a clear risk of significant currency depreciation sooner or later. When are bank deposits sound money?