Storing Some Value

Consider four ways that he might be able to store the value of a $2 hot fudge sundae for one week.

• The Good Itself: First, he could buy a freshly fabricated hot fudge sundae for $2 and store this product for seven days. Successful storage requires a freezer, especially during the hot summer days. But, would this hot fudge sundae retain its full $2 value one week hence? Probably not. The hot fudge would be cold. The whipped topping would be unwhipped. Then once the product is thawed enough to consume, the ice cream would be melted.


• Paper Asset: Second, he could purchase a $2 gift certificate from the ice cream store, a coupon can then be traded for one hot fudge sundae in the future. After a week, Duncan can redeem the certificate and enjoy his tasty treat. In this case the value of the sundae is stored in the coupon. While this is a relatively good store of value for the hot fudge sundae from this particular store, it ONLY stores the value of the hot fudge sundae from this particular store. A hot fudge sundae coupon cannot be used to store the value of other goods.


• Another Real Asset: Third, he could take his $2, use it to purchase another good, like a book, hold onto this item for a week, sell it, then use the proceeds to buy a hot fudge sundae. Of course, if the book is not very liquid, meaning that it cannot be easily converted into money, then he probably will not end up with the full $2 that he needs to buy his hot fudge sundae. Storing the value of one good by purchasing, then later selling, another good is seldom the best way to go.


• Money: Fourth, Duncan could simply keep his $2 stashed away in his billfold, a sock drawer, or a coffee can buried in his backyard. After one week, he can retrieve this money, then amble down to the ice cream parlor to make his hot fudge sundae purchase. In this case, he has stored the delicious value of the hot fudge sundae in the form of money.

The Evils of Inflation

Suppose, for example, that Duncan desires to store the value contained in a $2 hot fudge sundae by hanging onto $2 worth of money--two, slightly wrinkled one-dollar bills that he stuffs in his back pocket. If the price of hot fudge sundaes remains at $2 one week hence, Duncan can make this sundae purchase and enjoy his sundae satisfaction. Money has successfully stored value.

However, if the price of the hot fudge sundae rises to $2.50, then these two, wrinkled one-dollar bills does not successfully store the value of the sundae. Either Duncan needs additional money to make the purchase or he is forced to buy a less-satisfying product (say... a yogurt cone).

Of course, should prices fall (that is, deflation), then money is an even more effective means of storing value. Should the price of a hot fudge sundae decline form $2 to $1 over the course of the week. Then the two wrinkled one-dollar bills in Duncan's possession become more valuable. Duncan can buy two hot fudge sundaes one week hence.

The Other Three Functions

• Medium of Exchange: This function means that money is accepted throughout the economy as payment for goods and services. Buyers acquire goods by giving up money. Sellers receive money when parting with their goods. This is, without question, the most important function of money. This is the function that makes money MONEY.


• Unit of Account: This function means that money is used to designate the prices of goods and services. Any item that is generally accepted as payment for goods and services is also the obvious choice for denominating the prices of those goods and services.


• Standard of Deferred Payment: This function means that money is used to designate future payments, such as those for loan repayments. The standard of deferred payment is a natural result of the standard unit of account and store of value functions of money.