Store of Value

= a core Function of Money along with Standard of Value and Medium of Exchange

Introduction

Bernard Lietaer:

"The last classical function of money is as store of value. As noted before, it may be desirable to have as complementary currency one that is not used as a store of value. Currency was indeed not the preferred store of value in most civilizations. For example, the word capital derives from the Latin capus, capitis, which means head. This referred to heads of cattle and still is used today in Texas or among the Watutsi in Africa — “He is worth one thousand head”. In the Western world, from Egyptian times through the Middle Ages and until the late 18th century, wealth was stored mainly in land and improvements, that’s why it’s called Real Estate (irrigations, plantations, etc.). Specifically, if one desires to encourage circulation of a currency, one good way to do so is to discourage the hoarding of that currency through various mechanisms such as demurrage or expiration deadlines as will be explained next."

Typology

Therefore, classifying currencies in terms of their function of store of value is in fact the same as analyzing the way they relate to time.

Interest bearing currencies:

One way whereby one can encourage people to save in the form of a currency is paying interest. This is the typical situation with all conventional currencies because they are created by bank debt. Interest is a charge that is proportional to the length of time involved in the loan. In this type of currency, one receives interest by making a deposit in that currency; and one can borrow money by paying interest.

Zero-interest:

The vast majority of complementary currencies are simply operating without interest. For example, loyalty currencies or mutual credit systems don’t accrue interest, and for those systems where one can borrow complementary currency typically no interest is being charged either.

Demurrage charged currencies:

The opposite of an interest-bearing currency is a demurrage-charged currency. Demurrage is a time related charge on outstanding positive balances of a currency. It can be visualized as a parking fee on the currency. It operates exactly as a negative interest rate, and is used as a disincentive to hoard the currency. John Maynard Keynes, Silvio Gesell, Irving Fisher, and Dieter Suhr provided a strong theoretical foundation for this approach, and it was extensively implemented in the form of “stamp scrip” in the 1930’s. Today, the most successful grassroots complementary currency in Japan, the Peanuts, charges a demurrage of 1% per month.

Currencies with Time-Related Step Function Valuations:

There are also currencies that are characterized by “step functions” triggered by time, a crude form of demurrage. For instance, during the Central Middle Ages, the practice of renovation monetae was widespread. It meant that for instance every five years, the old currency would be withdrawn and 3 new pennies would be given in exchange for 4 old ones, implying a tax of 25% on the value of the currency at that point in time. This process produced income for the local currency authority (typically a local lord, bishop or monastery), and gave an incentive not to hoard this type of currency. Stamp scrip systems – whereby a periodic stamp has to be purchased and applied on the currency for it to keep its value – are modern applications of this principle.

Currencies with Expiration Dates:

The most radical “step function” is when a currency has an expiration date. This process is equivalent to a 100% tax on the date of the expiration.

Discussion

"Trade-offs are available between functions. If one desires to encourage the circulation of a currency as medium of exchange, one can achieve this most effectively by charging a “parking fee” of demurrage, or the simpler forms of step functions or expiration dates. The advantage of interest bearing currencies is that they provide an income to those who create the currency (called “seigniorage”). Its disadvantage is that it implies a systematic money transfer from people who don’t have money to those who do, so that it tends to concentrate wealth. It also gives an incentive to save in the form of currency as opposed to real assets. Finally, it provides a systematic incentive to think only short-term, as income generated in the distant future is discounted to irrelevance with positive interest-rate currencies.

In contrast, demurrage-charged currencies provide an incentive to circulate the currency as opposed to accumulate it. It also motivates to be concerned about long-term implications particularly for investments. The currencies with time-related step functions or expiration dates can be seen as cruder and more radical forms of demurrage-charged currencies." (http://www.global-community.org/gc/newsfiles/25/Community%20Currency%20Guide.pdf)