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What is Soft Currency?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 02 December 2016
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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.

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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.

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irontoenail
Post 3

@umbra21 - I guess the problem is that people hve to balance risk with possible currency conversions. Ghana, as you say, is cheap, but it can also be dangerous with malaria, food poisoning and so forth as distinct possibilities. If you go to somewhere with a "harder" currency, like Eastern Europe, you won't be risking that kind of thing so much, but you won't have as much value for money either. And finally, if you pay out the nose in order to vacation in a country that basically has hard currency or some equivalent, you won't have to worry as much about those kinds of problems (in theory at least). It depends on what kind of trip you want to take.

umbra21
Post 2

@pastanaga - On the other hand, if a country has a soft currency that isn't in constant flux it can be amazing to stay there for a while and take advantage of it.

That sounds awful, but actually you'll be helping out all the locals by being there as well. Ghana for example has a fairly weak currency, but they are generally considered a very stable country and the common language is English.

They have lovely beaches and rainforests and lots of historical castles and everything there is dirt cheap. I was living in another country in West Africa and everyone there would vacation in Ghana because it was the cheapest place around. You could get a whole, cooked lobster for

less than a dollar.

Of course, they had resorts like anywhere and those are always going to be expensive because they reflect whatever country they hail from, but if you stick to local operators your foreign currency in a country like that is going to take you a long way.

pastanaga
Post 1

It's amazing the stories you hear about countries which have really gone downhill to the point where the money has no value anymore at all. That's when you hear about people buying loafs of bread with wheelbarrows full of money, or governments issuing notes that are worth a hundred thousand units of cash.

Generally, I wouldn't go to any country that was fluctuating that much because they are usually politically unstable and the people are scared and unhappy. You might get caught in the middle of something.

But if you do have to go, try to bring some hard currency with you, and maybe some currency from a nearby country that isn't so unstable, but doesn't have hard currency either. The international currency exchange rates between neighboring countries are generally not going to be as extreme as they might be between a developed and developing nation.

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