When I give my sister a nonfiction book for Christmas, neither of us presumes that she’ll use it in payments for food, rent, clothes, travel, or something else that she desires. Indeed, you’d be hard pressed to find anybody who’d accept a 300-odd-page chunk of paper adorned with the Penguin Press stamp in exchange for anything, so she couldn’t really trade it away even if she wanted to.
If I give her a gift card to Strand in New York or Foyles in London — two of our favorite bookstores in the world — I very much expect her to trade away that little piece of plastic for some literary masterpiece, but I’d be surprised if Strand uses that card in turn to pay its suppliers. That’s possible, as employee-privilege trade credits do exist (and restaurants and cafés around the world habitually provide their employees with food as part of their compensation), but unlikely.
If I, like a good economist who accepts the deadweight loss of Christmas gifting, give her cash in a neatly decorated envelope, nobody bats an eyelash when those paper slips (actually, U.S. dollar notes are made of cotton and linen) continue their travels via her hands to merchants, deposited into banks at the end of the business day and subsequently withdrawn at an ATM somewhere else.
What’s so special about those pieces of paper that my Strand gift card and banded-together sheets of paper won’t do? It’s not merely that the first is money and the others aren’t, as they both have some monetary quality. For a consumer of books about to enter a Strand store, the gift card and cash are equally useful forms of payment — and to a secondhand bookstore, a used book might very well have some value that you’d be able to trade for (probably less than somebody originally paid for the book).
Degrees of Liquidity
Contrary to common beliefs, assessing the moneyness of a transactional item is not a binary choice; a thing is not entirely money or not money at all. Instead, it’s a gradient where some things are more like money and others are less like money. We might even call this quality “liquidity” — how easy it is to turn this item into goods and services. Even money itself, those little green slips of cotton that we instinctively think of as money and (so far) provide our only access to the Fed’s balance sheet, are not, as we shall see, always very liquid money.
In line with Nobel laureate John Hicks and other mid-20th-century monetary economists who argued that money is not merely a residual from planned transactions but an intentional decision of holding cash balances, Ludwig von Mises pointed out that uncertainty of future transactions is one of the reasons to hold money. He wrote:
A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production. (emphasis added)
Money, Mises showed in Human Action, may emerge as “a security hedge” against the uncertainties of life. Given that, you require an item (or object, commodity, string of code, or even debt) that many of your potential transaction partners will accept in exchange. Carl Menger, the 19th-century economist and founder of the Austrian school, would have described such an object as the most “saleable” good in an economy (often termed “marketable” in more recent scholarship), and later Austrian economists usually speak of money as the most liquid good or the “present good par excellence.”
In these exciting monetary times of unconventional monetary policy and aspiring monies like bitcoin and other cryptocurrencies that challenge the monetary hegemony of central banks, the question all monetary economists have been forced to reconsider is: how general is “general”? Sure, “most liquid good,” but where exactly?
The domain greatly matters as, say, a U.S. dollar note might be “generally” accepted in most places, even in Thailand, Argentina, or Guatemala, but you’ll struggle to find anybody in the U.S. accepting the Thai baht, an Argentine peso, or the Guatemalan quetzal in exchange for food, haircuts, or Christmas gifts.
In a recent paper written with Peter Hazlett, Sound Money Project director Will Luther considers precisely this question. Rather than simply rehashing the dispute over how general “general” is, the authors thoughtfully weigh in on the topic by considering under what domain an item used in exchange may be considered money.
This might sound unimportant, but it emphasizes the point that a number of currencies can co-exist and simultaneously be considered “money” as they are “generally accepted media of exchange” in a select domain only. Of course, restricting a domain far enough makes the description too trivial: with small enough domains, any good exchanged between two people would qualify as money. But restricting it too loosely — say, globally — disqualifies many smaller currencies such as the Icelandic króna, which evidently functions as money among a few hundred thousand people in Iceland.
While the authors focus merely on the question of whether bitcoin is money, the domain insight can be extended much further. Consider two frequently used forms of money and the transactions required to move one to the other: cash and bank deposits, grouped together to monetary economists as a currency area’s M1.
Although cash and instantly withdrawable cash deposits are both considered money — present goods, highly liquid, and accepted almost everywhere within a country’s currency area — they clearly have different domains. Cash is not always very liquid: paying rent in cash does happen, but usually landlords require bank transfers or direct deposits; in these festive and decorative times, New York City is filled with cute Christmas markets that sell art, hot chocolate, or clothing but shun cash in favor of various tech-savvy payment mechanisms; come tax season, good luck showing up at your local IRS office and dumping a bunch of dollar bills on the counter.
Similarly, there are many places in our economies that won’t take bank deposits channeled through debit or credit card systems: less tech-savvy pop-up stores, for one, and a sizeable portion of consumers all over America who demand cash payments — not to mention the plight of the unbanked (at least those who haven’t discovered J.P. Koning’s writing on prepaid debit cards). It has always been clear to monetary economists that cash and credit serve slightly different but overlapping needs and that the necessary conditions for both exist in our economies.
Nor is shifting the form of money that you hold a trivial venture — ask any traveler trying to withdraw cash from an ATM (at exorbitant currency rates) or a small-business owner trying to combine running their business with depositing cash during their local bank office’s hours of operation.
We could add gift cards to this equation. They — like bank deposits — are privately issued debt contracts redeemable at the issuer, and they illustrate the imprecise nature of Mises’s money description. Gift cards, like prepaid debit cards, are usually given away in exchange for goods and services at least once, but they can be used to settle debt or transactions for a few more turns before they are redeemed at the issuer. Obviously, outside the near vicinity (and opening hours) of a Starbucks or Strand or any other store, gift cards to these places are less liquid than cash and they have lower value than their stated amount to somebody that doesn’t drink coffee or read books.
With e-commerce, that’s becoming much less clear; Amazon vouchers already circulate as remuneration and a medium for debt settlement on university campuses. With Venmo or Zelle (or PayPal or Revolut, etc.), a holder of gift cards can easily exchange them for bank deposits if the holder knows a coffee junkie. For a fee, not at all unlike bank ATM fees, stores even redeem your gift card in cash.
Expanding the gift card idea, airlines have long incentivized their most frequent customers by offering rewards through various miles programs — miles usable to purchase more flights, or even hotels and a myriad of other things. When hotels and Uber and Amazon and countless other companies are getting into the business, and as tech solutions become easy and fleeting enough, there is no reason not to consider these balances “money”; after all, they can get you — or anybody you want — pretty much whatever you want.
Much more than rides or coffee or free flights, you can redeem them into Spotify subscriptions, donate them to charities, or turn them into gift cards at many other retailers. Indeed, you can even transfer them to other people. Large companies can already pay for acquisitions in newly issued shares; it’s not inconceivable that we consumers could pay for our consumption in partial share or bond ownership, using money only as a measuring rod in, say, our “Tesla-denominated checking deposits.”
Sure, it would be a stretch to say that gift cards and airline miles and Uber or Amazon cashbacks circulate in the economy anywhere close to how cash or bank balances move between our wallets. But it would also be an oversight reject their monetary status; they are privately issued tokens of purchasing power, backed by nothing but the promise of redemption by a large and well-known actor of whom most of us are repeat customers. That establishes all that’s required for a money: trust, redeemability, and transferability.
Comparing that to the long arch of monetary history, that’s not so far off. Perhaps the money of the future isn’t some sophisticated crypto token, but a private promise to consume a widely used service.
Made available by the American Institute for Economic Research.