A hard currency, also called a strong currency, is currency that is used by people in more than one area of the world, because it is widely accepted in exchange for goods and services. This is because it is seen worldwide as a reliable store of value. Hard currency must also be one that comes from a country which enjoys political and economic stability. Short-term stability in value and liquidity in foreign exchange markets are other traits typical of a hard currency. In many ways, the concept of a hard currency is related to that of a reserve currency.
In the 20th century, the U.S. Dollar and the British Pound emerged as the world's foremost hard currencies. Also, the German Deutschmark was considered to be one of the best hard currencies before it was replaced by the Euro. Apart from being useful for international exchange, hard currency can also be used in countries with command economies, such as the People's Republic of China, and the former East Germany. In these countries, as well as some others, there are and were special stores that would not accept the local currency, but only an internationally recognized hard currency. These stores often sold items that were scarce and/or imported, hence the need to pay suppliers in something more stable than local currency.
In economics, hard currency is seen as distinct from a soft currency, one which does not hold value well or comes from a country suffering from war, harsh dictatorship, or other political or economic instability. In some cases, soft currency can be seen as anything other than gold bullion, gold coins, or gold-backed paper. Although gold itself fluctuates in value, at least in terms of currency, these definitions of hard and soft currency are applicable when discussing a long-term economic tendency known as Gresham's Law.
This law, named after a 16th century English financier, states that high-quality currency will tend to be replaced over time with currency of lower quality. When this happens, the high-quality currency, like gold, will be used mainly as a store of wealth, while lower-quality currency will become the means of exchange. One example of this is the fact that the he U.S. Treasury abandoned the gold standard decades ago in favor of a fiat currency, which is the paper money now used in the U.S. It is not backed by gold, in the sense that the government will not now exchange gold for the paper, as it would under the gold standard.
