When we are searching for a definition of money, we may face many difficulties. It is because there are as many definitions of money as there are economists. Money is something you can experience but can’t define. One of the most acceptable definition of money comes from Walker – “Money is what money does.”
Now, different functions of money and evolution of money have tempted economists to come out with different types of money. Each and every form of money like fiat money, full bodied currency, token coin etc are some of them with given set of features though they are basically money in use.
One such classification is hard money and soft money.
The classification of money into hard and soft comes from the angle of whether an issued money/currency has asset backing like gold. Differentiation between hard and soft money came at the beginning of the last century when policy makers were in dilemma whether there is the need for keeping some credible assets like gold while issuing money.
Be careful that hard money is different from hard currency and soft money is different from soft currency. Hard currency is the one like the US Dollar which is very acceptable in the international market and is used as a medium of exchange for international transactions. On the other hand, soft currency is the one which is less preferable as a medium of exchange in the international market.
Hard money is money issued with the backing of gold or other very credible assets. This type of money issue was in practice nearly one century back. Confidence in the newly established paper currency was an issue during that time. Here, many central banks and policy makers advocated keeping of proportional gold reserves while issuing new currencies. An apt example for hard money is the gold coin itself.
But the system became outdated towards the middle of the 20th century. Here, money supply has to be expanded to meet the transaction demand of the expanding population as the volume of goods and services transaction exploded. This necessitated increased supply of money. The central banks were unable to get gold to match the issue of new currencies. Hence the hard money concept has lost its relevance.
Soft money is just paper currency backed by government bonds. Here money is printed without keeping adequate reserves like gold in proportion to the newly issued money.
Hard money avoids the risks of inflation, whereas the element of inflation is higher under soft money.