In the world of monetary economics, the term “hard money” represents money that is both scarce and difficult to create. The Austrian School of Economics views hard money in terms of its scarcity, including precious metals like gold and silver, with bitcoin serving as a modern-day illustration due to its finite supply and proof-of-work consensus mechanism. This is in contrast to commonly used fiat currencies, such as the U.S. dollar or the euro, which in their current form rely heavily on central banks and governments to regulate their supply; hard money exists outside the realm of centralized control.
The definition of hard money varies depending on context and economic ideology, encompassing actual currency to loans backed by collateral. For the purpose of this article, we focus on the economic sense, and we invite the reader to consider it in the broad context of money to better understand the dynamics of global macroeconomics, along with its structure, performance and behavior as an individual’s investment.
Characteristics of Hard Money
It is important to recognize that the characteristics of hard money systems can differ significantly. For example, when we consider various hard assets, such as real estate or fine art, we find that they are not easily portable or readily convertible into cash, which makes them less liquid compared to other forms of hard money, such as gold or bitcoin.
Therefore, when we talk about characteristics of hard money, they are not explicit rules. However some characteristics are significantly more important than others.
- Limited supply: hard assets such as gold, diamonds, rare artwork and bitcoin are considered valuable because they are scarce and difficult to obtain. The amount of currency in circulation is determined by the availability of the underlying asset, such as the amount of gold or silver that can be mined.
- Durable: hard money tends to be durable and able to resist wear and tear, ensuring its long-term value;
- Store of value: Hard money is considered a reliable store of value because it maintains its worth over time. The tangible backing of the currency helps protect against erosion of value due to inflation or other economic factors.
- Price stability: hard assets are often considered a hedge against inflation, as their value tends to rise when the value of paper currency declines.
- Historical track record: hard money systems have been used throughout history and have often been associated with periods of economic stability and prosperity. Advocates argue that hard money can help prevent excessive inflation, currency devaluation and financial instability.
- International standard: historically, gold and silver have served as international standards of value and mediums of exchange. Hard money systems based on precious metals have facilitated international trade and provided a common unit of account across different countries.
For these reasons, hard money is thought by many to be the most desirable form of currency to use as a reliable medium of exchange and particularly as a store of value because it’s more likely to hold value over time. Lenders and investors often prefer it in transactions because it provides a tangible, secure asset that can be used as collateral in case of default.
The Importance of Hard Money
Hard money is essential in promoting economic stability through a tangible, secure store of value that is not subject to the same risks and fluctuations of financial assets such as stocks, bonds or unbacked currencies. In times of economic uncertainty on a soft money or fiat standard, hard money (e.g., gold or bitcoin) is typically seen as a safe haven; they are expected to hold their value, as their supply is difficult to increase (or in the case of bitcoin, hard capped).
Hard money presents a robust shield against the inflationary forces that often trouble fiat currencies, especially those subject to governmental manipulation or unchecked money printing. By offering stability, it allows individuals and businesses to safeguard the value of their wealth, cultivating confidence and underpinning economic stability.
Throughout history, hard money has been instrumental in shaping monetary systems. As one of the earliest forms of currency — primarily in the form of precious metals like gold and silver — it offered a uniform medium of exchange that eased trade and other economic activities. This, in turn, helped societies transition from barter systems to more efficient economies.
Precious metals also provided a reliable store of value and standardization of currency through the use of coins, reducing the risk of fraud or disputes over the currency’s value and thereby fostering confidence among individuals and facilitating economic growth, development and international trade.
A Hard Money Standard
A hard money standard refers to a system where the value of a country’s currency is directly tied to a tangible asset. Under this standard, the government or the issuing authority guarantees that currency holders can exchange their money for a specified amount of the asset. The most famous example is the Gold Standard, where each unit of currency was pegged to a specific amount of gold.
Therefore, under a hard money standard, the value of the currency remains relatively stable over time. This stability can result in a more predictable price environment. In theory, if the currency’s value remains constant, prices of goods would tend to reflect their marginal cost of production. This is because producers would not need to account for inflation or fluctuations in the currency’s value when setting prices.
On the other hand, using soft money under a fiat currency system, where the value of the currency is not directly tied to a tangible asset, the price level of goods can gradually increase over time due to inflation. Inflation refers to the general rise in prices of goods and services over time, reducing the purchasing power of the currency unit.
For centuries, gold has been a highly sought-after commodity. Its durability and intrinsic value have made it an ideal choice for currency and a store of value across numerous civilizations like ancient Egypt, Rome and Byzantium. They minted this precious metal into coins which were then used in exchange for goods and services. Similarly, silver has a rich history as a type of currency and often was used in conjunction with gold as the lesser of the two monetary media.
Bitcoin is relatively new compared to gold and silver. Yet, it has gained recognition as a form of hard money in the digital age. The reasons for that include its property of decentralization, operating on a peer-to-peer network, and its scarcity which is guaranteed by its underlying blockchain technology and immutable protocol.
Various forms of money were considered “hard” due to their function as a reliable store of value and medium of exchange. For example, commodities like salt and cowrie shells were used as currency for centuries across regions including Africa, Asia, and the Pacific islands.
One fascinating aspect of monetary systems is that the hardest form of money — that with the greatest inherent and durable value — usually supersedes less stable forms, establishing itself as the predominant currency.
Comparison to Fiat Currency
Fiat currencies are government-issued currencies and unlike gold and silver they are not backed by tangible assets. Their value is derived from people’s trust and confidence in the issuing government and its ability to maintain the stability and value of the currency. They are generally used as a medium of exchange for goods and services, and their worth is subject to constant devaluation as central banks prefer price stability (which in their minds mean steady price increases) over market-led price discovery; that, in turn, prioritizes money’s role as a medium of exchange.
On the other hand, hard money is formed from assets with limited supply such as gold, Bitcoin, real estate or commodities that have intrinsic value and are considered a store of value themselves. Unlike fiat currencies, the value of hard assets is not dependent on trust or confidence in a particular government or institution. Instead, their value is based on factors such as supply and demand dynamics, scarcity and intrinsic properties such as durability and portability.
One of the main differences between fiat currencies and hard assets is that fiat currencies can be easily created or destroyed by the government or central bank, while the supply of hard assets is relatively fixed and subject to physical constraints. This means that fiat currencies are vulnerable to inflationary pressures and their value is corrupted over time, while hard assets provide a stable store of value and a hedge against inflation.
Source: https://www.goldavenue.com/en/blog/newsletter-precious-metals-spotlight/gold-vs-fiat-money
Even after the transition to fiat currencies between the 1920s and the 1970s, hard money continued to hold historical significance. Many fiat currencies were initially backed by gold reserves, providing confidence in the value of the paper money. This backing ensured that the currency could be exchanged for a fixed amount of gold, maintaining stability in the monetary system.
Alternative Use Cases for the Term “Hard Money”
As mentioned at the beginning of the article, “hard money” may have different uses, depending on the context. Here are a few:.
- Hard money loans are backed by the value of a physical asset, such as a car or home, — or a hard asset, like bitcoin — which constitute collateral. They are quite common in real estate investing. These loans are often provided by private investors or companies and are based on the value of the asset rather than the borrower’s credit score or ability to repay the loan.
- Hard money donations are political contributions made directly to a candidate’s campaign or a political party, subject to specific laws and restrictions set by campaign finance regulation.
- Government funding is typically the allocation of public funds for various purposes. It is considered hard money as it’s a stream of funds originating from taxation, borrowing, or other revenue-generating measures.
- Broker fees are typically a percentage of the hard money loan amount, such as 2% of the total loan value. In this case, the broker fee would be considered “hard money” because it is a direct monetary cost that a borrower must pay the mortgage broker.
Conclusion
As governments increasingly resort to infinite money printing and devaluation of fiat currencies through intentional inflation, awareness about sound money is growing. Sound money, or hard money, is better equipped to resist economic downturns and provide stability. The digital form of this, an alternative to precious metals which often have high barriers to entry, is now readily accessible to all.
The advent of digital currency, namely bitcoin, signifies a new era in the history of hard monies. This digital asset, frequently referred to as “digital gold,” shares key characteristics with traditional hard currencies, including scarcity and value preservation. It offers a compelling alternative to traditional fiat currencies, unlocking new opportunities for financial transactions and wealth protection.
Bitcoin Magazine guides you through an understanding of money to learn more about it and its role in society, your life and your investments. Knowledge is power, an observation that has never been more true than in the case of your wealth.
