Hard Money (also known as Sound Money) is money which is very difficult (i.e. “hard”) to produce.
The opposite of this is Easy Money, which is money that can easily be produced at the whim of the producer.
The reason that Hard Money is so important is that it holds it’s value because it’s supply cannot be easily increased.
Let’s use the example of the US Dollar, which is not hard money.
If the US Central Bank (called the Federal Reserve) decides to increase it’s supply by 10% in a year, the purchasing power of each Dollar in circulation drops by 10%
In reality, there is a ‘lag’ so the effect may not be felt instantly, but over longer time periods it becomes obvious.
In the UK, the average house price in the 1960’s was £2530.
50 years later and the average house price is £232,944.
That’s around a 100 times increase in 50 years.
Why? Because the Bank of England has continually printed money which is backed by nothing, and is extremely easy to produce.
Why is this a bad thing?
Because if you had put the cash equivalent of a house in the bank – or under your mattress – in 1960 and left it there until today, you would no longer be able to buy a house with it.
You may be able to rent one for a couple of months!
Effectively your ability to buy a house has been “stolen” from you by the printing of money.
Many people who do not have an understanding of economics will argue that a lack of supply vs demand has driven up the price of houses and that it has nothing to do with inflation.
Although supply and demand has affected house prices, it is not the primary cause of the massive increase in price.
To demonstrate that, a pint of beer was around 8 pence in 1960 whereas today it’s around £4.50.
That’s a 56 times increase.
Factoring in the technological advancements in producing and transporting the beer, as well as the competition between brands which has driven relative prices down, you can see how holding
Government paper currency (whether in physical form or digital form in a bank account) decimates your wealth over time.
Bankers and Keynesian Economists tend to make inflation sound extremely complicated and difficult for a “normal” person to understand.
But in fact it is extremely simple. Inflation is just an increase of the money supply!
This effectively steals wealth from the population:
Savers see the buying power of the currency they are holding decimated over time.
Even if they are earning interest on the money saved, this interest would need to equal the real inflation rate (which many economists believe is much higher than the stated inflation rate in most countries) just to maintain its purchasing power.
In reality, the interest offered when keeping cash under your mattress is zero, and putting it in the bank is barely any better, with arguably more risk.
Side note: As I write, several countries are experimenting with negative interest rates. One of the effects of this would likely see banks charging depositors to keep their money with them – the idea being to “force” the consumer to spend their money to stimulate failing economies. We will watch these developments with interest.
As money is printed to finance over spending by Governments, people get progressively poorer in their purchasing power unless their income increases at the same rate as inflation, which invariably it does not.
