Difference Between Hard and Soft Currency – Economics Essay
Since 650 BC man has used money to buy, barter and trade for goods and services. The Greeks were the first to use coins as monetary value which strengthened the economy and improved the quality for life for many.
(us.rediff.com) Today, with many countries in the world having its 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. Wikipedia.com defines hard currency 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 Deutschmark was considered perhaps the best hard currency. (wikipedia.com) If a countries currency is to be considered hard, then there are a few things 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. The next is the currency must be able to be bartered and traded all around the world. An example of this is the dollar. For those of you that have traveled oversees, there are few countries in the world that if you were there on vacation, you could not buy a Mai Tai with a few American dollars. In fact, 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.
Lack of inflation is also a stipulation for a countries currency to be considered hard. An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand. (inflationdata.com) 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. In terms of managing risks, utilizing or adopting hard currency is least likely to be a factor in the loss of funds. If using a weaker note, the odds of the note lessening in value or becoming completely non-valuable increase dramatically. Both Ecuador and Panama have taken the dollar as their national currency. Other strong currencies of the world are the Swiss Franc, the British Pound and the Japanese Yen.
American currency is so stable that it is used world wide for business deals and ventures. It is somewhat ironic to think that many countries actually buy million of dollars a year in US savings bonds to secure their countries financial future. As stated above, OPEC uses the dollar on all deals concerning oil, no matter what parties are involved. If love is the universal language, then the dollar is the universal currency. When dealing with other countries, taking out any extraneous concerns, like the currency becoming worthless, is fir 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.(budget.ro) 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. Unlike hard currency, soft currency is also not easily exchanged into other currency. Receiving soft currency for goods, other currency or services is risky because the monetary value you receive from x amount of soft currency today, has a strong chance of becoming less valuable, even by the hour.
As stated above, 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 and America all have taken full advantage of printing hard currency. Over the history of currency, countries currency has fluctuated between hard and soft. The challenges of the world’s currency super powers are to maintain their economic hold and maintain their hard currency reputation.