What Is the Store of Value Function of Money?

Money serves various fundamental roles within an economy, facilitating countless daily transactions. Among these functions, money acts as a medium of exchange, a unit of account, and a standard of deferred payment. A particularly important function is its capacity as a “store of value.” This function allows individuals and businesses to hold wealth over time for future use.

Understanding the Store of Value Function

The store of value function refers to money’s ability to retain its purchasing power over a period, allowing it to be saved and exchanged for goods and services at a later date. Wealth can be accumulated in the form of money and retrieved when needed. For example, if you earn $100 today, the expectation is that $100 will still command a similar amount of goods and services next month or next year, enabling deferred consumption or investment. This characteristic supports saving, enables long-term financial planning, and facilitates investment. Without this ability, individuals would have little incentive to save, hindering capital formation and economic growth.

Key Characteristics for Effective Value Storage

An asset must possess several attributes to serve as an effective store of value:
Durability: The asset does not perish or degrade quickly.
Portability: The asset can be easily moved and transferred between individuals or locations.
Divisibility: The asset can be broken into smaller units for various transaction sizes, while still retaining its proportional value.
Scarcity: A limited supply helps maintain an asset’s value, preventing it from becoming worthless due to overabundance.
General acceptability: The asset is widely recognized and trusted as a medium of exchange and a reliable measure of wealth.

These characteristics ensure that an asset, like currency, can reliably hold its value for preserving wealth across time.

Money’s Practical Role in Preserving Purchasing Power

Money performs its role as a store of value by enabling individuals and businesses to hold their wealth for future needs. For instance, a person saving for a down payment on a house or retirement relies on the stability of currency to ensure that saved funds will retain their purchasing power when they are ready to use them. Businesses also utilize money as a store of value by accumulating reserves for future investments, expansion, or to cover unexpected expenses. This allows for strategic financial planning beyond immediate transactions.

In contrast, perishable goods like fresh produce are poor stores of value because they quickly lose their worth due to spoilage. While money’s purchasing power can be eroded by inflation, a stable currency aims to minimize this loss, offering a relatively reliable means of wealth preservation compared to non-durable assets. Governments and central banks work to maintain currency stability through various policies, recognizing that a stable store of value is important for economic confidence and activity. This stability allows individuals to confidently save and plan for the future, knowing their money will generally command a similar amount of goods and services later.