Soft currency is currency with a widely fluctuating value which reflects a destabilized economic system. As a general rule, this type of currency is viewed as less desirable, and people avoid investing in it or dealing with it if possible. Struggling nations tend to have soft currency rather than hard currency, because economies are very sensitive to political turmoil and civil unrest.
Basically, soft currency is weak currency. When compared with standards such as the United States Dollar and the Euro, it does not perform as well, and the radically fluctuating value can make it very difficult to exchange or trade for hard currency. Many nations with such a currency also establish an artificially high exchange rate, which makes people even more reluctant to convert, and when people convert their currency and then attempt to convert it back, they can lose money in the process, thanks to the value fluctuations of the currency.
In some nations, there is a mixture of soft and hard currency. This was common in many Soviet Bloc nations during the 1980s. In these nations, the citizens used the soft currency associated with the national economy, while visitors had hard currency which they could spend in certain venues. Visitors were usually reluctant to convert their hard currency into the local currency, and some governments specifically banned their citizens from holding hard currency so that valuable hard currencies did not fall into the hands of residents of Soviet Bloc nations. This could be very frustrating for visitors, as they were not legally allowed to pay for many goods and services with hard currency.
Intriguingly, in situations where soft and hard currency are mixed, soft currency usually becomes the dominant currency in the economy, because people horde hard currency, rather than spending it. This means that the money in circulation tends to be primarily in the form of soft currency, because hard currency is unavailable. This can make it hard to convert between currency systems. Prices may also be quoted differently, depending on which type of currency someone is paying with.
Soft currencies are not backed by a commodity standard such as gold or silver, although lack of such a standard does not necessarily make a currency soft. In some regions, people will not accept soft currency as legal tender, forcing people who hold it to convert it into hard currency before they can access goods and services. This can be a significant barrier for people who are paid in weak currency, as they may find many products out of their price range as a result.
