Lessons in monetary terms

The general understanding of money and finance is incredibly limited. I started to notice that people would quote authors where they had not even read the text that they were quoting from. The problem here is that they take a small tidbit and treat it as if they understood the context in reality.

Consequently, I am going to define some of the primary terms and their correct usage in monetary theory.

Store of value

It is commonly known that money serves as a store of economic value. Such value is created through the potential use in exchange for other commodities, where money itself is a form of commodity. Money is exchanged for other commodities whose immediate utility in consumption exceeds that of the monetary commodity.

The asset which acts as a temporary store of value enables trade, and acts as a medium of exchange.

Many forms of assets outside of money have the capacity to store value. A common example is gold. The characteristic feature of money as a store of value is its inherent capability to measure against another unit. As such, it forms a unit of account. It is part of the necessary argument in the principle of nominalism. To put it simply, a USD100 note stores USD100 worth of value even in a period of high inflation, where the purchasing power of the USD100 depreciates relative to other commodities.

Throughout periods of inflation or deflation or periods resulting from other sources of volatility, money acts as a stable mechanism to denominate obligations and payments. Money can thus be treated as an independent measure of value without regard to other factors that may be extraneous to the monetary system that is used as a unit of account.

See: Proctor, C., Mann, F. A.: Mann on the legal aspect of money. 6th edn. ch. 9. Oxford University Press, Oxford (2005).

We may say that “a debt is not incurred in terms of currency, that in terms of units of account” [1] and further extend the argument by saying, “contracts are expressed in terms of the unit of account, but the unit of account is only a denomination connoting the appropriate currency” [2].

Consequently, a store of value is a function of a contract denominated in a particular unit of account. If a contract is directly denominated within bitcoin, bitcoin is a store of value for such an exchange. But, holding and saving bitcoin does not make it a store of value outside of a contract denominated explicitly in bitcoin.

Store of wealth

Many confuse a store of value with a store of wealth. Value and wealth are completely separate, and deflationary and inflationary pressures can change the amount of capital goods available for consumption when compared to other commodities.

A store of wealth maintains a capital position and the ability for an individual to consume at a given rate. An increasing store of wealth allows an individual or organisation to increment the amount of consumption or access to capital goods over time.

Value shares and stocks are a long-term but risky store of wealth. Bonds and similar instruments are a shorter-term and commonly lower-risk store of wealth that returns less on the investment.

Inflation hedge

Where the stability of a unit of account suffers through volatility or because of either high deflationary or inflationary pressures, an inflation hedge acts as a means of introducing stability into a volatile currency or where uncertainty exists. Both the US dollar and gold act as an inflation hedge. The USD is used by many African countries and a number of South American countries, for instance, over their own local currency due to the comparative stability.

Gold has been traditionally used as a means of storing wealth and creating a stable value platform in times of uncertainty. Such is why in times of uncertainty or even war many people move towards placing their money in gold. In the past, when gold was used as a backing mechanism for national currencies, gold itself could be a store of value — which no longer applies outside of contracts that are directly denominated in gold.

Store of value and the law

The store-of-value function of money has relevance to the law of unjust enrichment. In legal terms and in equity, an individual who receives a payment of money comes under the presumption that (s)he will be enriched by at least the amount of the receipt. The individual will not be heard to argue that money is not a benefit or that money cannot be used to discharge a liability.

The law recognises that the recipient may be enriched in some circumstances through the use of monetary instruments beyond the nominal value [3]. The individual could be held liable for the interest accruing on money or a fluctuation between exchange rates [4].

The law of property and money also underlies the principles of value in the rules governing tracing [5]. Money is capable of being mixed in the sense that the value is incorporated into a larger fund of value that may derive from other sources. It is important to note that even though many people may have contributed to the total value of the mixture, they will not necessarily take a proprietary right in the asset which is represented in it [6]. Monetary value in an asset differs from the exercise of allocating specific money assets to selected parties. Tracing follows the amount owed as a proprietary interest, and recognises assets belonging to certain claimants.

References:

[1] Adelaide Electric Supply Co. v Prudential insurance Co. [1934] AC 122, 148.

[2] Auckland Corp. v Alliance Assurance Co. [1937] AC 587, 605 (PC).

[3] Jeff and Jones, Law of Restitution (7th edn, London, 2007), paras 1.018, 1.033.

[4] Sempra Metals limited v Inland Revenue Commissioners (2007) UKHL. 34. [2007] 3 WLR 354.

[5] Foskett v McKeown [2001] 1 AC 102, 127 per Lord Millett.

[6] LD Smith, Law of Tracing (Oxford, 1997).