Money Fundamentals 3.15 Money is as money does – money functions: tool, measure, store of value

Money is a tool

Money is a social technology that makes it easy to exchange goods, services, property and value. Money circulates, facilitating millions of exchanges every second of every day. A single unit of money can facilitate many transactions. Money serves as a propeller for the economy, but whether it propels the economy into prosperity or ruin is determined by the choice of money system.

Money is a measure – a unit of account

The measure of money is established with use over time by a broad community.

Humans appear to have an inborn sense of fairness and justice. We measure reciprocity, and even young children recognize when something is not fair. As we developed the skills to live in larger and larger communities, humans needed ways to standardize fairness. So, if I put in a day’s work, I would get a standard measure of a day’s food ration. Or, if you killed a child, you had to pay a specified life debt to the parents. To this day, we use standard measures of the cost of living, working, and the cost of a death.

Standardizing requires quantifying, and quantifying requires a measure. We use money as our measuring stick for expressing value when we exchange goods and services in the marketplace. We decide our own sense of value based on personal preferences and experience, and then, money provides the measure we use to express that value in exchanges with others.

Our daily living measures began as measures of concrete things – an arms-length, a foot, a pace, a bucket, a bushel. Over hundreds of years, these measures have been refined and become more standardized and abstract. In the mid 20th century, a set of international standard measurements were calibrated to the properties of the elements and then to that of light.

A meter, which is now accepted internationally as the standard measure of length, is “the path travelled by light in a vacuum in 1⁄299,792,458 of a second (17th CGPM).3

Value when exchanging a good or service cannot so readily be matched to an exact physical standard. We value things for many reasons: necessity, pleasure, sentiment, moral reasons, convenience. We do not value things consistently; we sometimes pay several times what we think something is worth for odd reasons. I’ve paid too much for fabric in a frenzy of enthusiasm at a quilt show, that I could have purchased for less elsewhere.

So, it is not possible to establish money as an immutable standard of measure; it develops a relative and subjective, but moderately consistent standard, as we use it over time. This is similar to the way patterns of sound come to have a common word meaning to all who speak a specific language, but retain connotations for each of us. Individually and collectively we accumulate data points that turn a unit of money into a general measure of value.

Fixed or elastic value and measure?

Depending on the money system, money can be a variable or fixed measuring stick.

In a stable value money system, money as a measure does not shrink and stretch; it remains fixed. The amount of money in the system, while it may increase, remains proportional to the goods and services available. Once proportion and value are established in the marketplace, the amount of money has no impact on the prices of goods and services.

This does not mean things will always cost the same amount. But, it means the cost of anything will be determined by production costs and supply and demand in the marketplace, not by the availability and value of money. So, in a stable value money system, if the number of people buying eggs remains in the same proportion to the number eggs laid, the price will remain the same. If more eggs are in demand, but the supply remains the same, then the price will go up. Changes in price represent changes in the market, not changes in money’s value.

In an elastic value money system, the value of money itself changes – in addition to changes in the marketplace value of things we want to exchange. In our current system, in which money constantly declines in value, we call this changing value inflation – our money buys less and less over time. For example, if there are the same number of people buying eggs, and the same number of hens laying them under the same conditions, the price of an egg might still go from 10 cents to 10 dollars, depending on the fluctuating value of the money that will be used for the exchange. In the 1940s you could buy a dozen farm fresh organic eggs for 79 cents. Today, you’ll pay $4–10 for the same eggs. Of course, conditions have changed, so some of that change in the price of organic eggs is a result of marketplace changes, but some of the change is because our money does not buy as much as it once did.

An elastic value money shifts the power of marketplace decisions from consumers to those who control the expansion and contraction of the money supply, and hence the daily value of money. In an elastic value money system, there is no free market of individuals with control over their buying and selling decisions. Everyone’s sales and purchases are constrained by the few who control the value of each unit of money. Imagine trying to make a quilt or build a house with rulers that kept changing the size of one-inch from the length of your fingernail to the length of your hand! Well, that is what money does in our current system.

Money is a store of value

Money represents a fundamental promise from your community that the chosen money token will be usable into the future. Money lets us translate our work today into something we can exchange for goods and services tomorrow and over great distance. As such, it is a store of value. Money is best at storing value over the short term because it best serves as a medium of exchange and measure of value when it is circulating freely and not in storage. In recognition of the importance of money as a means of exchange, rather than a store of value, some money systems impose the equivalent of a parking fee for keeping money out of circulation. This fee is called demurrage in reference to the charge applied when goods on a ship are not unloaded by the agreed-upon time. Because applying and collecting demurrage is cumbersome, it is rare to find in a money system.

Depending on the money system, money may be a poor choice for long-term value storage. By design, in an elastic value money system, money will not be a stable store of value. Elastic value money systems can be designed so the value of each money unit steadily drops as the money supply steadily increases (as in most nations today). As the supply of money steadily grows, the value of each money unit goes down, and everyone’s store of money loses value, giving an advantage to those closest to the creation of new money (while it still has a higher value). This encourages people to spend for today instead of saving for tomorrow.

An elastic value money system can also be designed so the value of each money unit steadily increases (most commodity money systems and the new Bitcoin). When the money supply shrinks in proportion to the exchange activity (as will inevitably happen with a commodity of limited supply) the value of each money unit goes up, and everyone’s store of money gains value. An increasing value money system gives an advantage to those of great wealth who can get in early, stock up, and store the money. It also sets a higher value on the role of speculation in relation to money’s use as a medium of direct exchange. Speculation requires surplus wealth, and so the wealthy are more likely to benefit from an increasing value money system. Whichever way a variable value money system is designed – to steadily increase value or to steadily decrease value – the system gives privilege to those closest to the creation of new money and to people of great wealth.

Historically money stored and carried its value over time and distance in one of two forms: as an accounting of an IOU (a note), or as a tangible commodity (e.g. gold). An IOU or note is vulnerable to the demise of whoever, or whatever, is guaranteeing that the note will eventually be paid. So, people want the strongest most stable guarantor possible. For this reason, IOU forms of money have evolved to have a central government (community-wide) guarantee, as governments are generally the most stable guarantors – especially over generations.

Gold, or any commodity money, is considered by some to be a strong and safe store of value, even though its inflation-adjusted price has swung up and down between a low of $344 to a high $1,975 over the past century.^4 However, because any and all commodities are subject to supply and demand in the marketplace, commodities are a vulnerable and unstable store of value.

For these reasons, no matter what choice of money token, storing value over the long term is not the best or most useful function of money.

Money is a token, used by agreement of a group of people as a medium for exchanging goods and services, for storing value over time and distance, and for establishing a measure of value across society.