Hard and Soft Currencies

¶ … Soft Currencies The online encyclopedia of financial terms known as Investopedia puts it quite bluntly. A soft currency is simply another, a 'softer' or less pejorative name for a weak or unstable currency. "There is very little demand for this type of currency" amongst investors, because its values often fluctuate, making international businesses unwilling to invest in countries with soft currencies.

("Soft Currency," 2005) Soft currency nations make it difficult for companies to make money, because goods are sold in a currency with an unstable value, and local financing is difficult to obtain. Currencies from most developing countries are considered to be soft currencies. A soft currency is also called a vulnerable currency because tends to fall in value on foreign-exchange markets. Often, countries such as Latin American nations with heavy debt, or the former Soviet Block countries are used as the paradigmatic examples of soft currency nations.

Their currencies became unstable because of political uncertainty, such as the question of how to reconfigure a formerly command economy, and economic uncertainty, such as the hyperinflation incurred by many South American nations. "Governments are unwilling to hold soft currencies in their foreign-exchange reserves, preferring strong or hard currencies, which are easily convertible." ("Soft Currency," Hutchinson's Encyclopedia, 2005) In contrast, a hard currency is usually the major means of monetary exchange in a highly industrialized country, such as the United States, Japan, or the United Kingdom.

A hard currency is one that is widely accepted around the world and is fairly stable in its exchange rate when compared with other hard currencies. It has a consistent value because it comes from a nation regarded as politically and economically stable and is thus easily convertible.

("Hard Currency," 2004) What is it like to dwell in a soft currency nation? In describing his visit to Eastern Europe during the aftermath of the end of the Cold War and the death of communism, one economist wrote of a personal journey around these still-emerging capitalist nations. "Now we are entering a stretch of soft currency nations," he noted, upon entering former Soviet Block. "It showed immediately.

Hungary has made great strides in the past decade, but the consequences of decades of a blocked currency and a command economy were evident everywhere. The bloom is off the rose that blossomed in the early 90s.

The nation has few high quality products to sell to the world since it never had to develop them under the Communists." Hence a soft currency nation in the absence of international trade is almost entirely dependant upon immediate cash exchanges between nationals, and nationals alone, and a black market in hard currency dollars for its sustenance. Because there is no stable exchange rate in soft currency nations, countries are unwilling to invest in soft currency nations for fear of incurring a loss because of unpredictable currency fluctuations.

In soft currency nations, there is no easy access to local credit, unstable local banking practices, and hence even a weak loan and financing system for investment in potential businesses, much less outside enterprises. From a tourist perspective, Rogers writes of Hungary, "we could rarely use our credit cards. Who wants to lend money in a currency that may collapse at any time? We could use them only in a very few high-class hotels and restaurants.

An occasional cash machine would advance us local currency only," because the local currency had no real value outside of the immediate context of the nation. (Rodgers, 2001) The main way that developing nations with soft, as opposed to hard currencies can attract foreign investment is to attract businesses from abroad that are willing to invest in developing nations in exchange for cheap labor costs.

This can infuse dollars into the economy, but quite often-soft currency nations lack a stable economic infrastructure and system of distribution to make the produced goods valuable within the nation. Also, international manufactures and investors can take advantage of a cheap labor supply and sell the goods in hard currency nations at a great profit, contributing little to the long-term economic development of the nation, except in the form of a few lower level jobs and more goods to be siphoned off into the local black market.

In a land of hard currency, such as Japan, Rodgers noted as he traveled, "there are no currency forms, no black markets, no devaluation or convertibility worries," unlike traveling in a developing nation, or establishing a financial contract between a hard currency and a soft currency nation. "There is nothing quite like a sound currency" because of its security," for both the tourist and the company seeking investment.