Today we are particularly interested in the functions of money that Greco lists in his Chapter 4. As he says, these make up the functional definition of money. Here they are. Money is:
- a medium of exchange,
- a standard of value,
- a unit of account,
- a store of value, and
- a standard of deferred payment.
Our readers could already guess that we think of currencies and the money representations of those currencies more in terms of the medium of exchange function than the other functions, especially if you have read our post Theory of Wealth. However, let us think about some of the other functions here. Note that the wikipedia article on money lists "standard of value" and "standard of deferred payment" as being the same function. "Standard of deferred payment" is further defined as the unit in which debts are denominated. This then bleeds over into the "unit of account" function.
We think the "standard of value/standard of deferred payment" function also bleeds over into the "store of value" function. Most money is designed to have value in the future as well as in the present. This property is inherent in a standard as well. The point of a standard is to maintain some characteristic or quality over time. It would be absurd to call something a standard if it changed frequently. Therefore if money is a "store of value" over time, then it can also serve as a "standard of value/standard of deferred payment" as well.
If money were not relatively good as a "standard of value", then the comparison of corporate performance from quarter to quarter would be quite difficult. What would the comparison of quarter to quarter results mean if the accounting unit for this quarter was significantly different from the one for last quarter?
The trouble with believing that money is a standard of value and store of value is that it has not really worked very well in times of technological advances, population changes, national emergencies, and etc. It may work pretty well from quarter to quarter, but what about longer periods of time? For example and in particular, what does it mean to save money for retirement? If money were really a store of value over longer time periods, then it would be enough just to stuff cash in a mattress and keep it there until it was needed. That may have worked well in certain periods of history, but no one tries to do that today.
The problem with saving cash for retirement is inflation. Inflation means that it takes more cash in the future to pay for things than it does now. This happens even in ordinary conditions. Thus people today do not save for retirement by hoarding cash. Instead they buy investments that are expected to grow or otherwise mitigate the effects of inflation. That way, when they need cash to pay their bills, they can convert their investments to enough cash to accomplish that. So much for the idea of cash as a store of value for the long term.
Then there is inflation that occurs in extraordinary conditions, such as in time of war. We might have invested well enough to protect our retirements funds from ordinary inflation, but the requirements of war might make our calculations useless. Even investments might not be good enough.
Finally, there are population demographics. Health care costs are inflating at, say, 4 to 6 percent per year already, far faster than the 2 percent or so for the wider economy. That would be hard enough to save for, but consider also that the doctors in the Baby Boom generation are retiring in increasing numbers. If the supply of health care professionals is inevitably going to decline, then there will just not be enough of them. Even if we have invested well, we may be in an era of declining health care services that no reasonable amounts of retirement money can overcome.
We have run out of time today, so we must leave you with a teaser. Keep the weaknesses of money as a store of value in mind, and check back with us later.