We are told that money has three characteristics. It is a unit of account, a medium of exchange and a store of value. In this week's Dear Economist column, Tim Harford engages with some parents who want to make the government-supplied currency less like money. The parents give their child money in principle but always hold the cash and so can restrict purchases of sweets. That was all very well until the child was given money by others and so expressed a desire to use the money for some sweet accumulation. The parents want to stop this. In effect, they are hitting directly at the value of money as a medium of exchange.
Tim Harford responds:
I can see three options. You rule out confiscation. The second is to offer incentives for low sweet consumption by increasing or reducing your daughter’s pocket money. The trouble is that sweet consumption may be hard to monitor. The third is to admit defeat and let your daughter make her own choices. Sweets have costs and benefits, and your daughter appears to be a better economist than you are.
Tim argues that if you give a child money, you give them money and have to face the consequences. The problem with these choices is that if the child has strong preferences, as my eldest certainly would have, these options would be unlikely to work.
I've faced this same issue. We give her money and tell her she can spend it as she chooses. But what she wants to choose are sweets which is hardly surprising as it is so darn scarce in her life. My solution was this. She could purchase sweets but every time she did so, I would impose a health tax to compensate us for the additional expected health costs this behaviour would cause. (It is similar to option 2 above but with a clear rationale). The tax as a pretty hefty 100% of the sweet purchase price. My ever frugal daughter decided that was too much and figured that she would wait until she left home and enjoy the full benefits of the likely sizable fortune she would accumulate by that time. (This is something she has figured out before). So while we can manipulate the system we can't get around the fact that money is a store of value.
