Store of Value Versus Medium of Exchange

At first sight, it really is convenient to have money also play the role of store of value. However, there is a formidable hidden cost: this identity significantly exacerbates the boom-bust economic cycle.

The theory of time preference of money, which describes the rational trade-off between consumption today and saving for the future, explains this: When someone expects higher uncertainty in the future, a larger proportion of his or her wealth is logically kept as savings, and less is thus available for immediate consumption. Therefore, at the first signs of a recession, anybody who has money will logically save more and consume less, thereby exacerbating the recession for everybody else. In boom years, consumer optimism prevails, and people will tend to simultaneously dip into their savings to buy big-ticket items such as cars and houses, thereby pushing the boom into an inflationary period. While other factors also play a role in the creation of business cycles, it has been proven many times that consumer confidence significantly exacerbates the problem. Providing incentives to ensure that the medium of exchange does not also incorporate the store of value function would therefore automatically dampen this boom-bust tendency of the current system.

Speculation Versus Standard of Value

Joel Kurtzman's The Death of Money convincingly describes why and how the speculation on currency undermines currency's role as a standard of value. If, for example, a German company wants to invest in a plant in India, the biggest uncertainty lies not in the risks of the business itself but in what currency to use to make cash-flow projections: rupees, dollars, or Deutsche Mark? The initial investment is in Deutsche Mark, and the proceeds will be generated in rupees, but at what exchange rate can one match the two to determine the expected rate of return? While there are some tools available to manage this risk for short-term transactions, they often are not available for the long-term risks typical in plant investments, or they are simply too expensive. The net result: fewer cross-border investments, particularly in Third World countries, thereby reducing the worldwide efficiency of resource allocation. We will never be able to determine how many investments have not occurred because of this, but all indications suggest they are quite substantial.

Tool of Empire Versus Medium of Exchange

Recent history provides a telling example of the potential conflict inherent in these two functions of money: Before the collapse of communism, there was no need for anybody to stand guard next to a plant in Poland to ensure that it would not establish closer trade relationships with the West than the Soviet Union felt comfortable with. Having the Comecon currencies convertible only in rubles was an automatic and sufficient guarantee.

However, the problem with interest does not relate to any of these "moral" historico-religious reasons. Interest on money constitutes one of the most systematic causes of our destruction of the global environment. Consider as metaphor, for example, the life of a tree (or any other living resource): Because of interest, the net present value of any income far away in the future is negligible. So, it literally pays to cut down a tree and put the proceeds in a savings account instead of letting it grow for another decade or century. Similarly, the only types of tree worth planting commercially are the fastest-growing varieties such as pine. (Nobody plants redwoods for commercial reasons.) So even when we plant trees, we are systematically losing biodiversity.