Store of Value
defending against inflation
The store of value function of money ensures that you can hold some thing for some time and have reasonable confidence that it will maintain its value over that time. A valuable baseball card is a relatively good store of value. A diamond is even better. Gold has worked exceptionally well for an unparalleled period of time throughout human history. Cash is okay because people are not going to decide that dollars are worthless overnight, but as I will explain further, cash is far from perfect. In fact, holding all cash is a good way to guarantee that the value of that cash will decline over time in terms of its purchasing power.
To illustrate this point, consider how a burger from McDonald’s or a banana from the grocery store both cost much more today than they did 50 years ago. As such, if you had stashed under your mattress in 1970 the exact amount that it cost to buy both a burger from McDonald’s and a banana from the grocery store at that time, you could take that money out today and go to try to buy both but, chances are, you wouldn’t have enough money for either.
The overall purchasing power of the dollar generally tends to go down over time just like any other country’s currency. This phenomenon is summarized by the term inflation. Because governments continue to print money, there continues to be more and more money in the system. The more money there is in the system, the less each unit of that money is worth, so long as the value of everything going on in the system remains the same. This is because there are more units of money (dollars) but the value of the pie (economy) remains the same. In reality, the economy does not remain the same, but the increase in dollars happens at a faster rate than the increase in the actual economy. The ongoing pandemic and The Federal Reserve's response to it have provided an extreme example as the economy has contracted while the money supply has increased, both at unprecedented rates. Some of this is fairly complex and theoretical macroeconomics but the proof is in the past. The cost of a banana is probably not going back to a nickel.
Last modified 2yr ago