Plastic Cards & Money


This week on Facebook: As I remarked in my post last week, It is interesting that there appears to be different views on when credit cards become money!

Where does “plastic money” like debit cards, credit cards, and smart money fit into this picture? A debit card, like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller. It is important to note that in our definition of money, it is checkable deposits that are money, not the paper check or the debit card. Although you can make a purchase with a credit card, it is not considered money but rather a short term loan from the credit card company to you. When you make a purchase with a credit card, the credit card company immediately transfers money from its checking account to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month. Until you pay the credit card bill, you have effectively borrowed money from the credit card company. Measuring Money — M1 and M2

I was brought up in a world that depended on money in the from of cash and those that relied on it were invariably strapped for cash. The advent of plastic money in the 80s may have released some from this quandary,  in my case, making me a victim of the first plastic credit card that I possessed. Since then I use plastic quite a lot, however any form of cash is becoming obsolete¹ in a fiat money society. Perhaps an indication of this in the UK was when the government replaced the giro-cheques with plastic cards onto which the social welfare programme digitally transferred credit (in the same was as the State already digitally transfers, what is effectively public debt, into elements of private (consumer) debt by those that hold bank accounts).

The Department for Work and Pensions said: ‘We want to pay people their pension and benefits in the most secure way possible. We have designed the Simple Payment system to work in the same way as cheques.’ End of the Giro cheque

If the advertising on television is any indication of the result of this action by the public administration, it may be seen today in the television advertisements to improve a credit score and the rise of payday loan companies. I doubt very much  if Joe Public has any interest in M0, M1, M2 or even M3 money. Joe Public and others may believe that the banks  create money (2) often out of thin air (regardless of their purpose)². Banks, including Central Banks, only make loans, nevertheless I’m sure that Joe Public thinks that State fiscal policy ensures a never ending supply of money. While the politicians determine fiscal policy and predict economic growth, most electors share a common belief that chooses to ignore the State’s role every time it sets a fiscal policy that creates a public debt and believe in the existence of magic money trees³ with some justification.

Meanwhile the debate rages (even amongst economists) as to where plastic cards fit into the money supply and a simple explanation of this, without referring to money as ‘M’, is given in the article How Credit Cards and Debit Cards fit into the monetary system (3).

Consumer staples are essential products that include typical products such as food, beverage, household goods, and feminine hygiene products, but the category also includes such items as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation. Consumer Staples

Credit cards are short term private debts and consumer debt is not considered to be part of the money supply, even if the credit card monies are spent on consumer staples. However, consumers often simply take out loans on ‘other credit cards’ to cover a credit card debt. As the article ‘How Credit Cards and Debit Cards fit into the monetary system’ (3) concludes, credit cards are not part of the supply of money, but they may affect the demand for money. This can result in consumer debt often exceeding consumer income and the need for the consumer to consider reducing their debt load.

This raises questions regarding private and public debt, as the State never repays and rarely intends to repay public debt. Instead the State treats debt as does the holder of a credit card and uses public debt as a tool to allow adjustments to fiscal policy. In most cases the public debt incurred by a State is simply transferred to the taxpayer and where necessary profitable public investments are sold off. In the case of the UK, it is the UK Government Investments (UKGI) body that assists the State for any shortfalls in its fiscal policy. As I wrote in my 2012 post, public debt is a prolific mother and may even act as a  catalyst for the present increases in private debt.

Nevertheless private and pubic debt are not the same thing, in the case of private debt and especially a credit card, the debtor must find actual money issued by the State (or its acceptable equivalent) to repay the debt. I am reminded of ‘exorbitant privilege‘, a phrase coined in the 60s by Valery d’Estaing in reference to what he saw as the exorbitant privilege of the USA dollar introduced in 1944 by the Bretton Woods Agreement. Post the collapse of the Bretton Woods gold standard, fiat money became a global standard and public debt became the ‘exorbitant privilege’ of any State regardless of it having a floating or fixed currency.

State public debt simply sets levels of taxation to increase its money supply and uses inflation to reduce its liabilities. While private debt is incurred by a few, the State’s public debt is owned by every past, present and future taxpayer. The State not only uses taxation in a manner very similar to a credit card, but the State also acts as an asset stripper in the sale of profitable public investments. It is claimed that public debt is only incurred for the benefit of the many, something that Joe Public has yet to see.


1. Money — Functions, Approaches and Types: Money can be in various forms, such as notes, coins, credit and debit cards, and bank checks. Traditionally, economists considered four main functions of money, which are a medium of exchange, a measure of value, a standard of deferred payment, and a store of value. However, in modern days, only three functions of money, such as a medium of exchange, measure of value, and a store of value are taken into consideration.

2. How Banks Create Money: The money that banks create isn’t the paper money that bears the logo of the government-owned Bank of England. It’s the electronic deposit money that flashes up on the screen when you check your balance at an ATM. Right now, this money (bank deposits) makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of cash that you can touch.

3. How Credit Cards and Debit Cards fit into the monetary system: Many people use credit or debit cards to make purchases. Because money is the medium of exchange, one might naturally wonder how these cards fit into the measurement and analysis of money.

4. How credit cards changed our relationship with money: Plastic arrived in the UK in the form of the American Express charge card. It kick-started a revolution and made money and credit more accessible than ever. Initially, AmEx was accepted by just 3,000 hotels, restaurants, shops and car-hire companies in the UK and applicants needed an income of £2,000 a year to qualify for one and were charged a £3, 12 shillings annual fee. The maximum payment for any single transaction was £75 and balances were required to be paid in full each month.

5. How People Fall Into a Debt Spiral:,The world is awash in a sea of debt. People, companies, and even nations are caught in a borrow-and-spend cycle that results in ever-increasing debt loads. For consumers, the path to insolvency often begins at a young age as they grow up witnessing their parents’ struggle with their finances and paying off the mortgage or other loans. An endless stream of advertising—”Low credit? No credit? No problem!”—reinforces the idea that everyone has debt and that buying on credit is a normal and acceptable activity.


Referenced Articles Books & Definitions:

  • A bold text subscript above and preceding a title below (¹·²·³), refers to a book, pdf, podcast, video, slide show and a download url that is usually free.
  • Brackets containing a number e.g. (1) reference a particular included article (1-5).
  • A link (url), which usually includes the title, are to an included source.
  • The intended context of words, idioms, phrases, have their links in italics.
  • A long read url* (when used below) is followed by a superscript asterisk.
  • Occasionally Open University (OU) free courses are cited.
  • JSTOR lets you set up a free account allowing you to have 6 (interchangeable) books stored that you can read online.

¹The end of money (url*): Money is fast becoming digital. In at least eight countries, including Kenya and Zimbabwe, more people have registered mobile accounts than traditional bank accounts, while cashless payments have overtaken the use of notes and coins in many advanced economies. In the eyes of some high-profile economists, this trend towards digital payments is something to be encouraged.

²The money creation paradox (url): Indeed, amongst economists, it is a generally accepted fact that banks make money ‘out of nothing’ the moment they provide a loan. There is a good reason why economists refer to banks as “money creating institutions”… This simplistic and abstract explanation is the source of the lack of understanding about how money creation actually works and what its consequences are. Money creation is, in fact, far more subtle.

³How Bank Lending Really Creates Money (url*): Money is created when banks lend. The rules of double entry accounting dictate that when banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit. This demand deposit, like all other customer deposits, is included in central banks’ measures of broad money. In this sense, therefore, when banks lend they create money. But this money has in no sense been “spirited from thin air”.

One response to “Plastic Cards & Money

  1. Pingback: The Quantity Theory of Money | Aasof’s Reflections

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