Thursday, September 29, 2016

Money is Like a National Gift Certificate

For my birthday, my son and daughter-in-law gave me a hardware store gift card. They could not have thought of a more welcome gift for this mechanically tuned writer. A hardware store is a trove of fascinating gadgets crying for exploration. Usually though, my pocket book is a throttle on my enthusiasm. Their gift gave me a chance to have a tool usually out of reach due to budget discipline.

As I searched the store looking for a digital caliper*, I could not help but think that the gift card was so very much like the green money we use every day. Of course, being a gift card, it was also very much like my credit card except that the bill was prepaid. My goodness, I could think of many parallels between gift cards and money!

Let's explore some of  the parallels.

Money is a store of value. That was the first parallel that came to mind. My gift card had been prepaid with money for a fixed amount. It could be used at any time. It was certainly nice that I could carefully decide what to get. (I wanted to get something that would last so that I could remember their generosity every time I used the gift.) There was no need to hurry the purchase.

Green money has that same character. There is no need to spend it quickly. The ability to store value by building one's monetary inventory is a great feature of a stable monetary environment. You know, it's even possible that a nice little nest-egg could be a great help in buying something like a house when a down payment is needed.

A I continued to think on this, I could't help but think that green money is limited to use in a single store just like my gift card was limited to use in just one store. Another parallel! Of course the accepting store for green money is the entire United States, not a single small hardware store--but the principal is the same. Green money has limited use in non-dollar economies just like my hardware store gift card would have limited value in a grocery store. There would be a discount applied to either if I used them in a less-than-hospitable environment.

The more I thought about it, the more I realized that money really is nothing more than a super-charged gift certificate. It can be exchanged for anything that is for sale in the currency zone. Nice! Money has a huge exchange footprint!

And there are more parallels.  A gift certificate is paper like money. A gift card  is more like a debit card and linked bank deposit--electronic in accounting but limited in size.

How about the relationship between gift cards, debit cards, and a credit card? Well, gift cards and debit cards are prepaid while the credit card is a pre-qualified loan.

With all of these parallels, I began looking for differences. The first difference found was in the way a gift certificate is created and the way that money is created. A gift certificate is created when someone uses money to purchase it. Someone must first acquire that money and then purchase the certificate from a store willing to promise future delivery of store merchandise in exchange for the return of the certificate. No one seems to even consider the possibility of borrowing or lending a gift certificate but I guess it could be done if the gift certificate lender was willing to accept the risk of failure to repay.

Turning to the creation of money, modern money is created when banks lend. The process is simple. In exchange for a promise to repay, a bank will create a limited deposit in a transferable account. This may be a case of a bank lending to itself as when a central bank creates a loan to a sponsoring government, or it may be a case of a bank lending to a customer without deducting or limiting any other accounts existing in the bank. Either way, a tally of all the bank deposit accounts will show an increase directly equal to the amount of new loans created. New money has been created.

But here we see a striking difference between gift certificates and money. The person spending money on a gift certificate has first earned the money used to buy the certificate. On the other hand, during the creation of money, the first spender does not first earn the new green money he is spending. This is a HUGE difference between the two monetary instruments. The difference has profound effects on the long term psychology of the persons creating either of the two instruments.

First, consider the psychology of the store owner creating a gift certificate. He would be very reluctant to create the certificate unless he received something in return. After all, if he created a lot of gift certificates and gave them away, it would be equivalent to giving away the merchandise in his store. Good advertising but a sure path to business ruin.

The creation of money is far less personal. The creation of money by bank lending is a mechanical decision by an administrator. Lending by private banks is generally based on construction of goods of offsetting value. This would generally be viewed as a reasonable exchange that would preserve or improve the financial condition of the transacting parties. The lending of money by central banks to their sponsoring governments is not so easily characterized.

If we think of a central bank as creating a national gift certificate, the creation of money by a central bank lending to the sponsoring government is an act of giving away the merchandise in the store.

Walking out of the store with my new digital calipers in hand, I came back to the day-to-day world. I would use this digital tool and remember the source of the gift. That has happened many times.

The insights into money are just beginning. The clear parallels between money and gift certificates are striking, the sharp differences in work-required-before-spending sobering. I fully expect to explore these parallels further in future posts.

* A digital caliper is a tool long desired. It approaches being a luxury item.


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