Hard Money

Hard Money

Table of Contents What Is Hard Money? Due to its value and stability in goods markets 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) better than softer monies that have more volatile value. Understanding Hard Money Preference for Hard Money Alternative Uses of the Term Hard money originally referred to the physical properties of metallic money, which, unlike paper currency, is made of hard substances. Hard money thus has a more stable value over time relative to real goods and services and a strong exchange rate relative to softer money. Users of money historically have tended to prefer to hold harder money because its more stable value makes it more useful in its functions as a medium of exchange, a store of value, and a unit of account for profit-and-loss accounting in business.

Hard money refers to a currency that is made up of or directly backed by a valuable commodity such as gold or silver.

What Is Hard Money?

Hard money originally referred to the physical properties of metallic money, which, unlike paper currency, is made of hard substances. This is the origin of the colloquial English expression, "cold, hard cash."

The distinction between "hard" metal coins and "soft" paper money was borne by the fact that metallic coins are solid, physical tokens with intrinsic economic value independent of their monetary status. Meanwhile, paper fiat currency only represents a promise to pay the bearer in physical money upon redemption.

In the absence of metallic monies, hard money today often refers to other types of monetary instruments that, to some extent, behave more like metallic money in domestic and international markets. Examples include gold bullion or cryptocurrencies such as bitcoin.

Hard money refers to a currency that is made up of or directly backed by a valuable commodity such as gold or silver.
This type of money is thought to maintain a stable value relative to goods and services and a strong exchange rate with softer monies.
Hard money has historically been highly prized for its relatively greater usefulness as money to mediate the exchange of goods, store value, and conduct profit-and-loss accounting.
Today, most countries issue fiat or "soft" currency, which is not backed by any tangible commodity.
The term hard money also has several other uses, some of which relate to the reliability or confidence that people place on the thing that they are referring to.

Understanding Hard Money

Hard money maintains a stable market value relative to real goods and services and a strong exchange rate relative to foreign currencies. Due to its value and stability in goods markets 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) better than softer monies that have more volatile value.

Essentially, the use of hard money involves lower transaction costs and risks than using soft money. This distinction originated when comparing the metallic content and confidence in the metallic standard of commodity money and eventually carried over to the comparison of various modern paper or fiat monies.

Because the value of paper currencies tend to fluctuate on the forex market, according to confidence in the promises of payment that they represent, and decline 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. Hard money thus has a more stable value over time relative to real goods and services and a strong exchange rate relative to softer money.

Regardless of whether a currency is backed by commodities or not, money is only useful in exchange and as a store of value if it is a socially accepted unit of account with which to measure value.

Preference for Hard Money

Users of money historically have tended to prefer to hold harder money because its more stable value makes it more useful in its functions as a medium of exchange, a store of value, and a unit of account for profit-and-loss accounting in business. This tendency is part of the origin of Gresham's Law (the other part being legal tender laws). Volatile fluctuations in the value of a currency or the steady erosion of value over time make softer money less useful for these functions.

As governments around the world gradually dropped the use and legal tender status of precious metal money and precious metal backing, such as the gold standard, for paper currency, it was this relationship that stuck when comparing hard versus soft paper currencies. Hard money, as it is used today, usually describes fiat money whose issuer shows restraint in the volume of currency they supply and whose government is relatively stable politically and responsible fiscally.

Such currencies tend to lose value more slowly over time through inflation and maintain a more stable exchange rate compared to the currencies of similar, hard money currencies. Maintaining a hard currency policy is a major goal of monetary and fiscal authorities in some highly developed nations, such as Switzerland, and hard money is often highly desired on the international market because its stability and reliability make it more useful in the settlement of international trade and as a bank reserve.

Those who adhere to the Austrian theory of economics, such as Libertarians, view the re-establishment of hard money as a critical piece of gaining economic stability.

Alternative Uses of the Term "Hard Money"

Hard money is also a term used in a number of other contexts in finance. All of these are related to the original economic distinction between hard and soft money in that they indicate the degree of confidence or reliability that the involved parties can place on certain funds. or financing.

Political Contributions

In politics, the term hard money means money donated directly to a politician or a political action committee. Hard money contributions carry some limitations and regulations, including how much you can contribute and the use of the funds. By comparison, donations to political parties, which don’t face the same limits and controls, are often referred to as soft money contributions.

So, while an individual can donate up to $2,900 in hard money per election to a specific candidate in 2021, they could donate an unlimited amount to a political party. Soft money in this sense is a less reliable way for a donor to support a specific candidate because the party may redirect funds to candidates of their choosing.

Broker Commissions or Fees

Hard and soft money can also refer to how clients pay their brokers or financial services providers. In this case, hard money refers to direct payments for services rendered — brokerage commissions — while soft money refers to payments for indirect items, such as the settlement of a costly error by providing free research.

Soft money arrangements in the financial industry are common but are not usually disclosed to stakeholders and regulators.

Lending

A hard money loan is one that 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. Loans of this type typically have a higher interest rate than what the borrower might receive through a traditional mortgage lender or other established financing channel.

Private investors or individuals most often issue a hard money loan as lenders of last resort due to timing or perhaps the distressed financial situation of the borrower. 

Government Funding

Hard money is a term sometimes 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 could take the form of government daycare subsidies or annual scholarships to post-secondary students.

Hard money is a preferred form of funding by government sub-units and government-funded organizations because it provides a predictable stream of funds. In the case of a student scholarship, it provides budget certainty to the student planning for their time in college. By comparison, one-off grants can make long-term planning and budgeting more challenging.

Related terms:

Accounting

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Austrian School

The Austrian school is an economic school of thought that originated in Vienna during the late 19th century with the works of Carl Menger.  read more

Broker and Example

A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. read more

Chartalism

Chartalism is a non-mainstream theory that emphasizes the impact of government policies and activities on the value of money. read more

Collateral , Types, & Examples

Collateral is an asset that a lender accepts as security for extending a loan. If the borrower defaults, then the lender may seize the collateral. read more

Cryptocurrency : What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that uses cryptography and is difficult to counterfeit because of this security feature. read more

Depression

An economic depression is a steep and sustained drop in economic activity featuring high unemployment and negative GDP growth. read more

Exchange Rate

An exchange rate is the value of a nation’s currency in terms of the currency of another nation or economic zone. read more

Fiat Money : How Is Currency Valued?

Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver. read more

Forex Market

The forex market is where banks, funds, and individuals can buy or sell currencies for hedging and speculation. Read how to get started in the forex market. read more

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