What are Hard Money and Easy Money?
Hard money and easy money are polar opposites to each other.
Easy Money Definition
Easy money is also known as cheap money.
As the name implies, easy money is relatively easy to create by increasing its supply.
Consequently the currency does not retain its value and the economy will end up flooded with cash. In fact over time easy money destroys the wealth of the people that use it.
Hard Money Definition
Hard money is also known as sound money.
Sound money is hard to get a hold of. It is money which cannot increase in its supply or is hard to increase its supply.
As a result it has greater value. It is able to maintain its value across time and therefore acts as a store of value.
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 up until 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 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 fulfill 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. By time it reduces the value of the currencies central banks issue.
Gresham’s law states that bad money drives out good money. This happens if one 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 safe keeping.
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 because of the US government removed the coins out of circulation. However it was also in line with Gresham’s law; the coins were partly kept by the population.
Easy Money Vs Hard Money
|Easy money||Hard money|
|Minimum effort to obtain||Hard to obtain|
|Encourages spending, but eventually can overheat an economy||Encourages saving|
|Causes inflation||Financial stability|
|Currency decreases in value||Currency increases in value or remains stable|
Benefits of Hard Money
Sound money is hard to get, like 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 go take on the valuation the market has for that currency. As opposed to having an artificial fixed-rate currency, it is has a flexible exchange. So the rate is adjusted according to the currencies demand.
Since sound currency is more in tune to 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 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:
- Rai stones
- 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 like for example 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. Like how 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 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 over correct 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:
- Lowering interest rates
- 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 by time the money supply got manipulated anyway. America had printed more money than was backed by gold in their 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 August 1971. This was effectively a default on America’s debt obligations.
Additionally what Nixon did had both immediate and long term consequences.
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 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 the 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 a population would prefer to go down the hard money route. Unfortunately we cannot count on politicians to stay away from easy money.
Additionally 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.
In fact 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 Bitcoins 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 anyway.
Unfortunately Bitcoin has two problems at the moment:
- It definitely has value, but it is volatile. However over time it may stabilise.
- 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 populations have chosen their own money. In this case there is a slow adoption over time that has four stages. They are:
- The money starts as a collectable
- Moves into a store of value – people hold the money because it keeps going up in value.
- Becomes a medium of exchange – transactions happen using the new money.
- A unit of account – items and services will be priced in the new money.
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 a 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.
You can directly buy the Bitcoin Standard from Amazon.
Frequently Asked Questions
What is an example of hard money?
· Rai stones
· Other cryptocurrencies with a fixed supply