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Are Credit Cards A Form Of Money?

Credit Cards and the Money Supply

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[Q:] Credit Cards are a form of Money. Is it True or False? Why?

[A:]An interesting and unusual question about credit cards! Let's take a look at what is considered to be money and where credit cards fit in.

In the article How much is the per capita money supply in the U.S.? we saw that there were three basic definitions of money: M1, M2, and M3. We quoted the The Federal Reserve Bank of New York as stating:

"[M1] consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada."

Since credit cards do not fall under M1, M2 or M3 they are not considered to be part of the money supply. Here's why:

Suppose my girlfriend and I go shopping for classic video games, and I find a copy of Music Machine for the Atari 2600 selling for $50. I do not have the $50 so I get my girlfriend to pay for the game on my behalf with the promise that I'll pay her back at some later date. So we have the following transactions:

Girlfriend gives Shopkeeper $50

Mike gives Girlfriend promise to pay $50 in future

We would not consider this loan to be "money" for a couple of reasons:
  1. Money, in any form, is generally recognized as a very liquid asset, that is an asset that can be quickly converted to cash or used as cash. My Barry Bonds baseball card, while printed on paper like money, is not considered to be money because I cannot convert it to money without searching for someone who will buy it from me. I cannot go into a store and purchase groceries in exchange for the baseball card.

    Similarly, my debt to my girlfriend would not be considered money because she cannot use it as a form of money to make purchases and it is not trivial to find someone who is willing to pay her cash in exchange for the loan.

  2. The loan is a mechanism in which money will be transferred from me to my girlfriend, but the loan is not money itself. When I repay the loan I will pay her $50 which will be in the form of money. If we consider the loan as money and the payment of the loan as money we're essentially counting the same transaction twice.
The $50 my girlfriend pays the shopkeeper is money. The $50 I will pay my girlfriend tomorrow is money, but the obligation I hold between today and tomorrow is not money.

Credit cards work in the exact same manner as this loan. If you buy the game using a credit card, the credit card company will pay the shopkeeper today and you will have an obligation to pay the credit card company when your credit card bill comes in. This obligation to the credit card company does not represent money. The money part of the transaction between you and the credit card company only comes into play when you pay your bill.

If you'd like to ask a question about credit cards, the money supply, or any other topic, or comment on this story, please use the feedback form.

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