How would the economy look differently if money was only an exchange medium and not a store of value, or vice versa?
In: Economics
Money is both today, and it’s preferred as a liquid store of value. You can store value less liquidly, and earn better returns on it, so it’s not going to make all value storage in cash make sense.
If something has value, it is inherently a potential store of value. Therefore if it has value as an exchange medium, it will have function as a store of value. An, conversely if it has value, it has potential as a medium for exchange, as well. The two are inherently related.
There are things that are really only a medium of exchange *or* a store of value, but they don’t make very good money so they aren’t used (alone at least). Bulk commodities are stores of value because their relative worth to the economy tends to stay pretty stable, but you don’t want to use trucks of gravel or silos of grain as money. Similarly, things like limited time coupons are a sort of medium of exchange, but they don’t really store value because they turn into a pretty worthless piece of paper after a short time so they can’t be your only form of money
Currency is an exchange medium. Everyone in the transaction believes it has value, and the people exchanging goods or services agree on the value of the currency vs the value of the good or service.
A store of value is more or less something that people agree has value, but can’t be classified as a good or service. This would be stocks, property, trade goods that you do or don’t hold (like trading metals on the open goods market, or investing in futures markets).
The major difference between them is that their values can change independently from each other.
Alternatively, they are similar in that they can even become [near] worthless in the case of hyper inflation, or the housing market crash in 2008.
For it to be money, it has to be both on some level. But you could imagine a bad currency being better at one than the other.
An example of a terrible store of value but OK medium of exchange might be a currency with predictable but high inflation. Everyone would know their money won’t be worth as much in a few months so we’d all try to spend it quickly on necessities or something that is a store of value. Interest rates would be very high if banks want anyone to save so borrowing costs would be sky high. It’d probably be very hard to run a business.
For the opposite, maybe a situation like Bitcoin where it can gain or lose 30% in a single day. It might be a good store of value over time (or not; we’ll see) but the volatility makes it a pretty lousy medium of exchange. If Bitcoin became the only currency for some reason and stayed just as volatile, merchants would have to constantly adjust prices and consumers would have to constantly keep track. People would probably delay some purchases until the currency went back up and the volatility would make for an unstable economy.
Currency is *generally* a poor value storage medium due to inflation.
In the short term, it’s not a noticeable issue but over years your money will be worth less, despite having the same face value.
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