Hard and Soft Currencies

For thousands of years people have used money to buy, barter and trade for goods and services. The Greek empire and various trading partners were the first to use coins as monetary value which strengthened the economy and improved the quality for life for their society (us. rediff. com). Today, with virtually all countries in the world having their own currency, there are many things to know in terms of how the different currencies are exchanged, traded and spent. One of the most important aspects of currency is the differences between hard and soft currency.

In this paper, I will analyze the differences of the two and debate the relationship between them. Let us first start out with the text book definition of hard currency. Hard currency can be defines as currency in which investors have confidence, such as that of a politically stable country with low inflation and consistent monetary and fiscal policies, and one that if anything is tending to appreciate against other currencies on a trade-weighted basis. Examples of hard currencies at this time include the United States dollar, the Euro, the Japanese Yen, the British Pound and the Swiss Franc.

Before its replacement by the Euro, the German Mark was considered perhaps the best, or most stable post WWII, hard currency (answers. com). If a country’s currency is to be considered hard, then there are a few items that need to be in place. The first thing is the country needs to have a stable government in place. America, although every four years has the potential to change its political leaders and views, has little chance of revolution or an invasion that would completely uproot the stability of our society, although recent issues with oil may undermine our economic stability.

The next is the currency must be able to be traded in the open market all around the world. An example of this is our trusty US Dollar. For anyone hat has traveled oversees, there are few countries in the world that if you were there on vacation or business, you could not buy goods or services with actual US dollars vs. local currency. In fact, to date the American dollar is the sole currency used to make all oil deals in the world, even those deals that happen within the confides of the middle east, although there are some aspects of OPEC that want to allow this to use Euros as well.

Limited or controlled inflation is also a mandate for a country’s currency to be considered hard. An increase in the amount of currency in circulation will result in a relatively sharp and sudden fall in its value and rise in prices. Spain and Germany tried with complete economic failures. All currency goes through different levels of inflation, what is important that hard currency will depreciate less then the currency in other countries. Through much experience, the American government has done a good job of controlling inflation using both monetary and fiscal policy.

Due to America’s continued stability in terms of its government, military and societal demands; the American dollar continues to be one of the strongest currencies in the world. America’s sustained involvement on the world stage in terms of political and monetary issues hopefully will and has secured a strong future for the American dollar. There have been many instances where other countries have discarded their failing currency and have taken a hard currency as its national currency, usually by pegging their currency to the US Dollar, China has just recently stopped doing this.

Other strong currencies of the world are the Swiss Franc, the British Pound and the Japanese Yen. American currency is considered stable and it is used world wide for business deals and ventures. It is interesting to think that many countries actually buy million of dollars a year in US savings bonds to secure their countries financial future, this is also a double edge sword as if these countries pull out of these investments the American economy can be negatively impacted.

As stated earlier, OPEC uses the dollar on all deals concerning oil, no matter what parties are involved.. When dealing with other countries, taking out any extraneous concerns, like the currency becoming worthless, is the first key to success. Using a hard currency like the dollar evens out the playing field and ensures that all parties involved will benefit from the transaction. Soft currency on the other hand is defined as a country’s currency which is not acceptable in exchange for currency of other countries, due to unrealistic exchange rates.

Soft currency is normally a product of new countries and countries that do not have the industry or the resources to have a strong and stable platform to grow a society on. This currency not only fluctuates greatly in value, but is also under the constant risk of loosing some or all of its value at anytime. Unlike hard currency, soft currency is also not easily exchanged into other currency, or for that matter not available on the open market.

Receiving soft currency for goods, other currency or services is risky because the monetary value you receive from some amount of soft currency today, has a strong chance of becoming less valuable. Soft currency begins initially with nations unable to enjoy the rewards of hard currency without the penalty of inadequate consumption by the poor and inadequate national infrastructure with which to support human and environmental rights, civilized values, and often national defense.

Such poorer nations are condemned to employ other nation’s currencies or soft currency of their own. Once they use soft currency, poorer nations often try to harden it by using soft currency (cheap money) to motivate higher production from year to year and high rates of savings. There are many factors such as political, social, economical and military stability that play a part in making a currency hard. A country which produces hard currency has many advantages over those countries that do not.

Possessing hard currency makes it much easier to do business world wide. It can be equated to have a good credit score and shopping for a car. You will be much more likely to not just get the car, but get it for cheaper with a good credit score. Countries like Japan, Brittan, European nations and America all have taken full advantage of printing hard currency and have thus enjoyed being major economic powerhouses. The new global business environment will show overtime how shifts in power will affect these and other economies.