What Is Hard Money?
Hard money originally referred to the physical properties of metallic money, the origin of the colloquial English expression “cold, hard cash.” The distinction between “hard” metal coins and “soft” paper money is evident in the intrinsic economic value independent of the monetary status of metallic coins. Paper fiat currency only represents a promise to pay the bearer in physical money upon redemption.
Key Takeaways
- Hard money is a currency made up of or directly backed by a valuable commodity such as gold or silver.
- Hard money has historically been highly prized for its greater usefulness as money to mediate the exchange of goods, store value, and conduct profit-and-loss accounting.
- Most countries issue fiat or “soft” currency not backed by a tangible commodity.
Hard Money Value
Hard money maintains a stable market value relative to goods and services and a strong exchange rate relative to foreign currencies. Due to its stability in goods and financial markets, hard money fulfills the economic function of money as a medium of exchange, a store of value, and a unit of account.
Hard money involves lower transaction costs and risks than soft money. This distinction originated when comparing the metallic content and confidence in the metallic standard of commodity money and carried over to comparing various modern paper or fiat monies.
Because the value of paper currencies fluctuates on the forex market, according to confidence in the promises of payment that they represent, and declines in value over time as issuers inflate their supply, “hard” versus “soft” money also became associated with the relative stability of exchange rates of certain national currencies.
In the absence of metallic monies, hard money can refer to other monetary instruments that behave more like metallic money in domestic and international markets. Examples include gold bullion or cryptocurrencies such as bitcoin.
History of Hard Money
Historically, users of money held harder money because of its stability. This tendency is part of the origin of Gresham’s Law, which stemmed from using precious metals to manufacture coins and their subsequent value. Since the abandonment of metallic currency standards, the theory describes the stability and movement of different currencies in global markets.
As governments dropped the use and legal tender status of precious metal money and precious metal backing, such as the gold standard, for paper currency, this relationship stuck when comparing hard versus soft paper currencies. Hard money usually describes fiat money whose issuer shows restraint in the volume of currency they supply and whose government is politically stable and fiscally responsible.
Such currencies tend to lose value more slowly over time through inflation and maintain a stable exchange rate compared to similar, hard money currencies. Maintaining a hard currency policy is a goal of monetary and fiscal authorities in some highly developed nations. Hard money is highly desired on the international market because its stability and reliability make it useful in international trade and as a bank reserve. Gold is a component of central bank reserves because of its safety, liquidity, and rate of return.
What Does the Term “Hard Money” Mean for Political Contributions?
In politics, “hard money” is donated directly to a politician or a political action committee. Hard money contributions carry limitations and regulations, including the amount contributed and the use of the funds. By comparison, donations to political parties, without limits and controls, are referred to as soft money contributions.
What Is a “Hard Money” Loan?
A hard money loan is backed by the value of a physical asset, such as a car or home. The collateral for the loan means that this hard money loan has a more reliable value than an unbacked loan.
What Is “Hard Money” Government Funding?
Hard money is a term used to describe an ongoing funding stream originating from a government agency or other organization. The flow of funds represents a reliable series of payments rather than a one-time grant. Hard money can describe government daycare subsidies or annual scholarships to post-secondary students.
The Bottom Line
Hard money is a currency made of or directly backed by a valuable commodity such as gold. Historically, hard money was highly regarded for its usefulness as money to mediate the exchange of goods, store value, and conduct profit-and-loss accounting.
