Money Is a Medium of Exchange, Not a Store of Value
Take a banknote out of your wallet. It pays for groceries, fuel and a restaurant bill without a hitch – as a medium of exchange, money works flawlessly. But put that same note in a drawer for ten or twenty years and compare how much it actually buys you afterward. That's the core of the problem: money is an excellent medium of exchange, but a poor store of value. That's precisely why, for millennia, people held physical gold alongside money – an asset that fulfils that second function far more reliably.
The three functions of money
| Function | What it means | Does fiat currency (koruna/euro/dollar) fulfil it? |
|---|---|---|
| Medium of exchange | Lets you easily pay for goods and services | Yes, very well |
| Unit of account | Used to set and compare prices | Yes, very well |
| Store of value | Preserves purchasing power over time | Not in the long run – inflation erodes it |
Medium of exchange: money does this brilliantly
Economic theory traditionally defines money by three functions: it's a medium of exchange, a unit of account, and a store of value. On two of these, fiat currencies – money not backed by a precious metal, such as the koruna, euro or dollar – work almost flawlessly. The state issues them as legal tender, banks settle them in real time, and the whole economy uses them as a shared language for comparing prices. No one doubts they can pay for a purchase with a banknote or a card.
Store of value: this is where money falls short
The third function is a different story. Central banks can print fiat money with practically no limit, and the more of it there is in circulation, the less you can buy for the same amount. A Czech example illustrates this well: a 1,000-koruna note from 1993 has a real purchasing power today of only 281 koruna, as our article How Inflation Devalued the Koruna Since 1993 describes. Money sitting in a checking or savings account doesn't shrink on the statement, but its real purchasing power quietly dissolves – this phenomenon, with concrete figures, is covered in detail in the article Gold vs. Savings Account: the Comparison.
Why this happens: money without backing
Until 1971, the US dollar (and, indirectly, other world currencies with it) was backed by gold, which gave the money supply in circulation a natural ceiling set by the available gold reserves. After that link was severed – the so-called Nixon Shock – the money supply in the economy has depended purely on the decisions of central banks and governments. You can read more about this turning point and its consequences in our article The Gold Standard: Why the World Abandoned It. Without a fixed link to a limited resource, the money supply can expand faster than the real economy – and that is exactly the mechanism that undermines money's role as a store of value.
Gold: an asset that holds on to its value
Gold, by contrast, has worked as a store of value for thousands of years, thanks to properties no printed banknote has: it's physically scarce, mining a new ounce takes years, the metal doesn't decay, and no central bank can double its quantity by decision. That's why gold's long-term purchasing power has historically behaved differently from that of paper currencies – explored in more detail in the article Gold and Inflation: Why It Protects Savings. Gold isn't used as a means of everyday payment today – money remains far more practical for that – but as a complement for preserving the value of savings over time, it does its job more reliably.
What this means for your savings
The practical takeaway isn't "stop using money," but to separate the roles: keep money in your checking account for spending and as a short-term reserve, while the portion of savings meant to preserve value over time can sensibly be complemented with an asset that has historically held up better against inflation. For a rough guide on the right share, see the article How Much Gold Should Be in a Portfolio? At GOLDU you can start with something as small as a 1g Argor-Heraeus gold bar, a popular 1g PAMP Fortuna gold bar, or the 1 Oz Wiener Philharmoniker investment coin. A portfolio can also be rounded out with investment silver.
Frequently asked questions
Does this mean I shouldn't keep money in a bank account?
No. Money in an account is irreplaceable for spending and as a short-term liquidity reserve. The issue arises when long-term savings meant to preserve value are also kept there.
Why doesn't gold work as an everyday medium of exchange?
In practice, it isn't used to pay for purchases today – money is far more practical for that. Gold serves a different function: preserving value over a longer time horizon.
How fast does money actually lose value?
It depends on the inflation rate in a given country and period. You'll find a concrete example of how the koruna has evolved since 1993 in our article on currency devaluation.
Is this principle widely accepted, or just a view held by gold investors?
The distinction between money's functions (medium of exchange, unit of account, store of value) is a standard part of economic theory. How well fiat currencies fulfil the store-of-value role during periods of high inflation is, in turn, the subject of broader economic debate.
Disclaimer
This article is provided for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any asset. For more information, see Risk Disclosure and Nature of Information Provided.
