What is Hard Money and Easy Money?

Hard money and easy money are polar opposites to each other.

How Easy Money Is Created – Debasement

In the past there were many different types of monies that worked well. The best form of money that worked well for over 5000 years is gold and silver.

Gold and silver coins still maintain their value today. Hence they are a form of hard money. In fact, the best currency standard used to be the gold standard.

However, the problem is that currencies are in the hands of governments and central banks. It is up to them to figure out and implement financial and monetary policies.

So long as governments do not debase currencies the money will remain sound. However, it is a big ask for government officials not to tamper with monetary policy.

This is because politicians tend to make a lot of promises to their populations. So they constantly ask central banks to give them money. As a result, politicians end up debasing the currency and creating a lot of debt to fulfil their promises.

It does not matter which method governments debase with. Whether by inserting digits in a computer or decreasing precious metals in coins. Both methods have exactly the same effect. It makes the money unsound. Over time it reduces the value of the currencies central banks issue.

Gresham’s Law

Gresham’s law states that bad money drives out good money. This happens if one form of money in the system is more valuable than the other. Consequently, people will horde the good money that has a better store of value. They will put it away for safekeeping.

Eventually, the money will vanish and no one will ever see it in circulation again.

Example of Gresham’s Law: The US Dimes

In 1965 President Lyndon Johnson signed a new act removing all the silver content from US coins. It did not take long for the pure silver coins to disappear from circulation.

Firstly the US government removed the coins from circulation. However, it was also in line with Gresham’s law; the coins were partly kept by the population.

Easy Money Vs Hard Money

Benefits of Hard Money

Sound money is hard to get, for example, gold or Bitcoin. In fact, both are mined and they are really hard to produce. Since both are hard to produce there is not a lot of gold and Bitcoin around. This is actually a really good thing.

This is because it creates a knock-on effect. Hard money encourages saving. Savings are essential for capital investment and the basis of capitalism. It makes people think of the long term and encourages entrepreneurship to advance society. 

A currency that is sound will take on the valuation the market has for that currency. As opposed to having an artificial fixed-rate currency, it has a flexible exchange. So the rate is adjusted according to the currency’s demand.

Since sound currency is more in tune with the market, any resources for products or services are better allocated. This is because the system as a whole caters for supply and demand. So there are no distortions in the market.

Therefore asset bubbles are non-existent because sound money creates financial stability. Prices of goods and services remain stable over a long period of time. As a result, financial assets to invest in such as stocks, bonds and real estate are more affordable.

If there is inflation it is usually temporary because of supply and demand issues that crop up. In a true capitalist society where the currency is not manipulated, governments do not interfere in this natural process.

Instead in a free market, the prices will sort themselves out and will come down on their own. That is to say, the cure for high prices is high prices. Hard money improves a society over time and makes it more prosperous.

Examples of Hard Money

Firstly money needs to have certain qualities. It needs to be:

• Durable – so that it lasts over time.
• Divisible – so you can give back change.
• Portable – so you can easily take it wherever you want and pay with it.
• Fungible – Each note or coin is equal to another one of its kind.
• Store of value – it retains its value over time.

Not all sound money in the past had these qualities, but they had most of these qualities.  

Some examples of hard money are:

• Gold
• Silver
• Rai stones
• Bitcoin
• Other cryptocurrencies with a fixed supply

If there are different monies in a financial system, the money that is harder will win. That is to say a population or country will end up adopting it over the other currency.

In fact, in the 1800s some countries adopted a silver standard, such as India. Other countries adopted a gold standard. The countries that adopted the gold standard did far better than the countries that adopted silver. This is because the harder currency always wins the hard money race.

Consequences of Easy Money

Easy money requires little effort to obtain or create. In today’s society, central banks just print money. Ben Bernanke, Fed Chair between 2006-2014, explains in this short 22-second video clip:

Easy money sounds great, but it has a lot of negative consequences. Some economists say that easy money has its benefits. Firstly because easy money can stimulate a weak economy. This in turn will help investment and spending.

This is true in the short term. Things will be better than they could have been if central bankers had not intervened because it decreases the impact of a downturn.

However, the problem is that central bankers keep getting involved in every problem. They do not let the market sort itself out on its own. So central banks end up making the problem worse in the long term.

As a result, some short-term pain is better for long-term gain. Like how it would pan out if there is a hard money system. On the other hand, when central banks intervene the next problem becomes larger than the previous one.

This is because there is always a tendency to get involved and overcorrect the problem. So over the long term, it is not in a society’s best interest to have easy money.

General Consequences of Easy Money

Easy money leads to high inflation, creates asset bubbles and widens the gap between the rich and the poor.

Towards the end of the economic boom fuelled by money printing, your purchasing power gets reduced a lot. You will not easily afford financial assets like stocks, bonds and real estate. Also, other things across the economy go up in price as well, including daily needs like food.

Additionally, easy money discourages savings. So entrepreneurs who are the lifeblood of an economy have a hard time establishing businesses.

If you consider most businesses in an economy are mostly small to medium-sized businesses this is a huge deal. To clarify, this is because combined they hire a large percentage of employees. As a result, there is more unemployment.

The Cantillon Effect

The people that are closest to the money printer are the ones that benefit the most from it. This is called the Cantillon Effect. This is because these people do not feel the immediate effects of inflation. That is to say, they are able to go buy assets and things cheaper.

This is because inflation takes time to surface. By the time the new money moves down to the population, inflation would already have set in.

Additionally, our system works by allowing big businesses to borrow easily at very low rates. Sometimes rates are at zero interest rate to borrow.

Of course, it makes it hugely beneficial for them to borrow money at these levels. On the other hand, the population does not get this benefit. So it keeps increasing the gap between the rich and the poor.

Easy Money Policy

Apart from printing money central banks have some other tools to encourage borrowing and spending. They are:

1. Lowering interest rates
2. The central banks reduce their reserves

Central banks implement these policies so that money flows more easily through the economy. To clarify, easy money is not just wanted and practiced by a few select countries. Even the most disciplined of countries can and do inflate their currencies. Additionally:

Public opinion always wants easy money, that is, low interest rates.

Ludwig von Mises

History of Today’s Easy Money

Several decades ago, all currencies were pegged to the dollar which was tied to a gold standard. In fact the dollar back then was considered as good as gold and hard money.

The gold standard forced central banks to limit the currency supply to a degree. Although over time the money supply got manipulated anyway. America had printed more money than was backed by gold in its reserves.

Some other countries had noticed this and so wanted to get their gold from the US. It was effectively like a run on the bank.

This was not good news for America. So America needed to make sure it did not end up without any gold. As a result President Nixon took the dollar off the gold standard on the 15th of August 1971. This was effectively a default on America’s debt obligations.

What Nixon did had both immediate and long-term consequences.

Currency Devaluation

As soon as Nixon took the dollar off the gold standard the stock market went into a frenzy. This was a direct result of the currency devaluation and it was called the ‘Nixon Rally’.

According to Ray Dalio who lived through this experience on Wall Street, the market went up by 25%.

The Rise of Fiat Currencies

All the world’s currencies were tied and are still tied to the dollar. So when the dollar came off the gold standard, all the world’s currencies suddenly became fiat currencies. As a result, none of them are hard money and they do not have solid foundations.  

In fact, Central banks around the world are printing a lot of money. They keep printing money in larger and larger amounts. Since the financial crisis of 2008 central banks went on a money-printing binge.

… If paper tickets are to be money, and the State is to have the sole power to issue these virtually costless tickets, then we are all at the mercy of this gang of legalized, sovereign counterfeiters.

Mises Institute

Initially, money printing by central banks started slowly. However as time went by, worldwide debt has risen a lot. What a lot of people do not realise is that it is unsustainable. As a result, the whole system will crash in the future and will give us a rude awakening.

Solutions for Hard Money

Unfortunately, easy money robs future generations of their wealth and prosperity. This is not something that anyone would willingly want to do. As a general rule, parents want to see their children doing better than themselves.

So if people knew better, a good portion of the population would prefer to go down the hard money route. Unfortunately, we cannot count on politicians to stay away from easy money.

Politicians will always find a way to manipulate the financial system. Hence why a gold standard will not work long term. Instead, we need a system that is not flexible. Something where the politicians’ and central banks’ hands are tied.

This is why people are saying that Bitcoin is superior to gold. This is because Bitcoin’s code is not flexible so no one can tamper with it. Additionally, Bitcoin’s maximum supply is set at 21 million coins.

Developers can make some minor changes to the Bitcoin code. However, the 21 million limit is hard-coded and no one can alter it in any way.

Bitcoin has two problems at the moment:

1. It definitely has value, but it is volatile. However, over time it may stabilise.
2. Bitcoin is not fungible.

Bitcoin has a good chance that it will get adopted as a hard money solution. Perhaps another cryptocurrency might end up getting adopted as sound money instead.

How Money Gets Adopted

Sometimes instead of politicians dictating what money to use, the public has chosen their own money. In this case, there is a slow adoption over time that has four stages. They are:

1. The money starts as a collectable.
2. Moves into a store of value – people hold the money because it keeps going up in value.
3. Becomes a medium of exchange – transactions happen using the new money.
4. A unit of account – items and services will be priced in the new money.

Further Reading

Saifedean Ammous is a world-class economist. He has written about the cause and effects of easy money and hard money in his book the Bitcoin Standard. In fact, the book is featured in our top list of recommended cryptocurrency books to read.

The Bitcoin standard makes a case for people to use Bitcoin as the basis of a sound money system. Whether you agree with it or not, it is well worth a read. Saifedean goes into the history of money and into related topics. He lays out important information for anyone seeking financial education on hard money.

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