In the past, paying for things while traveling overseas was complicated. You had to convert some of your native currency into the local currency or get travel checks demarcated in local currency. Today, you can just hop on a plane with whatever major credit cards you have on hand and fly anywhere in the world and pay for anything with a swipe of the card.
Has this widespread adoption of credit card effectively made them a universal currency?
Of course, behind the scenes, the financial institutions who actually lend you the money you spend with the card must do all the swapping of currency that individuals used to do in the old days, but they do so today with computerized systems that operate almost automatically. From the perspectives of buyers and sellers the transaction looks like one transacted in their respective native currencies.
Credit cards have evolved into a meta-currency much as paper currency evolved as a meta-currency for deposits of gold. Paper money began as a convenience that allowed people to stop schlepping around standardized chunks of precious metals — i.e., coins — and to instead merely swap pieces of paper representing gold that hopefully existed in a vault somewhere. Eventually, paper gold notes became so widely accepted that people stopped worrying whether the gold actually existed. Likewise, we might see a time in the near future when people stop paying attention to the existence of national currencies.
Only their inability to transfer payments to ordinary individuals (as opposed to a business) prevents credit cards from immediately serving as a full-fledged currency. Yet, services like Paypal, which lets individuals receive payment from virtually any country for goods sold via Internet services (such as ebay), show that very little work remains to create a system in which individuals could exchange money without being members of a formal business. Direct deposit and debit/credit cards already make it possible for a person to live a near-cashless life. Most large-scale institutional transactions today involve nothing more than computers in one bank deducting numbers from an electronic ledger while a computer in another bank adds numbers to its ledger. Soon all transactions will take this form. In twenty years or so, young adults may lack the intuitive understanding that the numbers in their credit card information once represented slips of paper.
What consequences might this shift have? I have some ideas but I would like to open up a discussion.
[note: I don’t want the thread to devolve into a discussion about the gold standard. This is a dead issue as far as I am concerned.]
The essential characteristics of a currency are trust and convenience. People use paper currency either because it is convenient and adequately reliable (most countries) or because they have no choice (e.g., Zimbabwe). But if a paper currency is significantly destabilized by govt policy errors people may stop using it in favor of alternative paper currencies, precious metals or barter.
Credit cards and Paypal are not perfect substitutes for currency, because of high transaction fees. It doesn’t make sense to pay such costs for many transactions. But for merchants who would lose sales if they insisted on cash payment, and for transactions by telephone and online, where payment by cash or check is risky and inconvenient, the transaction costs of credit cards and Paypal are outweighed by their convenience and relative security.
Gift cards also represent an interesting form of currency.
I wonder what effect these things have on the true amount of “money” in circulation, and hence on inflation/deflation.
Jonathan,
Credit cards and Paypal are not perfect substitutes for currency, because of high transaction fees.
I would argue this is merely a matter of technology. Once, only large commercial interest used gold notes. Paper money in general only took off after technological advancements made it possible to create difficult to counterfeit bills.
Not to long ago only large business and the wealthy used credit cards. Now they are ubiquitous due largely to technological change. Cash also has a transaction cost, usually in the form of the time needed to acquire it and the risk of carrying it. People grouse about ATM fees only because they do not intuitively translate their own time into money when they talk about it but they do when they actually act.
I don’t see transaction cost as being a long term (10+years) barrier. If it did, the use of electronic payments would not be spreading as fast as it is.
David Foster,
I wonder what effect these things have on the true amount of “money” in circulation, and hence on inflation/deflation.
I think it will destroy the ability of central banks to regulate the supply of their own currency. We will the effect first in small currencies and then it will spread to larger ones. Some believe we’ve already passed a critical threshold using just the international currency markets.
Shannon,
The currency is converted to an electronic payment somewhere in the chain. As far as I know there is no direct transfer from government to private concern that does not include some accounting for paper money, or other hard form of currency. Perhaps in the future that will occur, but the central bank will still have control over the amount of currency in circulation.
Iamnotachef,
I’m not so sure that every “dollar” in a computer has a physical counterpart anymore. Even if they do, the actual bills just work as gold once did, sitting in a mound in a vault while the proportional ownership of the mound trades hands as the true currency. Most argue that widespread reserve banking long ago destroyed the relationship between physical monetary tokens and the money supply.
Even if the physical bills exist, that will not prevent a currency from deflating due to external trades in the currency. If a lot of people buy things in the country with credit cards, the cards’ lenders will have to buy a lot of the currency the currency will grow to strong and people will hoard the currency because they believe it will appreciate in value.
Shannon,
I am talking about now. It’s conceivable and perhaps even likely that non-paper currency will eventually become dominant, but it isn’t dominant yet.
(Note, BTW, that cash still has a privacy advantage for users. That’s not trivial and makes paper currency generally preferable for some types of transactions.)
WRT money creation: fractional-reserve lending creates money. Fed control over bank reserve requirements is a standard tool of money-supply management.
Moving from paper currency to e-currency and its affects reminds me of Neal Stephenson’s “The Great Simoleon Caper.”
http://www.time.com/time/magazine/article/0,9171,982610-1,00.html
Yes, this has diminished the problems a tourist faces in changing money, etc. (Of course, if you are in a black market economy I suppose you miss some of the buying power real money gave you – but the iron curtain has fallen, etc.) A global economy asks for a global currency – but we can see how little we want to give up the standards of our own. Doesn’t this do what we want it to do without doing what we don’t want it to?
Sure, when I had my business, I put off accepting cards because of the cost. But the lessening of paperwork, the lack of worry about bounced checks, the lack of worry about burglaries – they all were good arguments. (I suspect charge cards have diminished the number of burglaries of small businesses?)
I can put a ten in my purse and not spend it for a month at a time and only write three or four checks a month. Of course, most people aren’t as flakey as I am, but the difference between losing money and a charge card is not a trivial difference. At the end of each month – and then each year, we have a pretty good idea where our money has gone. I like charge cards, I like the freedom they have given us, the ability to handle a larger expense that arises suddenly. I like ordering on-line. It is true, they can be seductive – but then all things that free us let us abuse our freedom.
Arherring,
Thanks for the link to the Stephenson story. I’ll read it when I get the time.
It occurs to me that I have never actually seen the word “Simoleon” written down.
Shannon,
If a lot of people buy on credit, the value of the currency might very well decrease rather than increase. We are seeing that occur in the U.S.A. And while there might not be a one-to-one correspondence between printed currency and the electronic representations in everyone’s bank accounts, there is a correspondence.
Fluctuations in a currency’s value will occur because of external trading regardless of what is backing the currency. Even if every dollar were backing by the equivalent in gold we would still have fluctuations.
Iamnotachef,
I was thinking less of people buying on credit and more of the effect of people rapidly transferring currency across national borders. The supply of any particular currency has to sync with that countries production. Rapidly moving currency can disrupt this sync causing inflation or deflation.
From my understanding, transporting cash across national borders to be converted and spent doesn’t necessarily have a huge macroeconomic affect on the currencies market. The transition to credit cards doesn’t have a huge affect on the amount of money one spends, except maybe increasing the availability of money and propensity to spend. It also doesn’t affect what currency the transaction is denominated in.
What the shifting from cash to credit cards really does change is the shifting of large orders of a specific currency from the foreign currency exchange firms to credit card issuers. At least IMHO.