I’m studying US history with my daughter, and there’s a section which discusses “soft money” backed by silver and “hard money” backed by gold. The book seems to presume that the reader understands how one or the other is preferred by either farmers (borrowers) or bankers (lenders.) Their presumption is incorrect, as I certainly do not understand it! If the paper money represents the value of a certain numeric quantity of a precious metal, then what difference does it make what kind of metal it is?
So, could one of you fine scholars out there explain it like I’m five and not approximately ten times older than that? Thanks in advance!
In: Economics
There is an important relationship between debt and inflation that underlies the thinking here. Debt represents a fixed number of dollars. No matter how high inflation goes, the amount you have to repay never changes. But if the currency inflates, a bushel of corn becomes worth more dollars. For farmers, inflation means more dollars coming in to cover the same debt.
Bankers are on the opposite side of that trade. They get the same repayment, even though the dollars they are receiving are worth less. So their staff, rent, and other expenses are going up but their income stays fixed. In extreme cases, this can make banks more prone to failure which is bad.
Farmers wanted soft money backed by silver because it would create more inflation. Bankers wanted hard money backed by gold because there would be less inflation.
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