What Is Hard Money?

Hard money originally referred to the physical properties of metallic money (made of physically hard substances) versus paper currency (made of relatively softer paper). This is the origin of the colloquial English expression, "cold, hard cash." The distinction between "hard" metal coin and "soft" paper money represented the fact that the metallic coins are solid, physical goods with economic value independent of their monetary status, while paper currency only represents a promise to pay the bearer in physical money upon redemption. In the absence of metallic monies, hard money refers to another type of money that to some extent still behaves more like metallic money in fulfilling its role as money on domestic and international markets.

Key Takeaways

  • Hard money maintains a stable value relative to goods and services and a strong exchange rate with softer monies.
  • Hard money tend to be highly prized for its relatively greater usefulness as money to mediate the exchange of goods, store value, and conduct profit-and-loss accounting.
  • The term hard money has several other common 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.

Due to the readily observed tendency of value of paper currencies to fluctuate wildly according to confidence in the promises of payment that they represent and to decline in value over time as issuers inflate their supply, "hard" versus "soft" money also became associated with the relatively stability, and exchange value of different types of money. Hard money 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. 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 a 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 in 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 it's stability and reliability makes it more useful in the settlement of international trade and as a bank reserve.

Alternative Uses

Hard money is also a term used in a number of the other senses. 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

  1. 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 have the same limits and controls often get the name 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.
  2. In lending, a hard money loan is one which 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 and 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. 
  3. 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 governments 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 his or her time in college. By comparison, one-off grants can make long-term planning and budgeting more challenging.