Four Money Functions

• Medium of Exchange: Credit cards do (sort of) function as a medium of exchange. Like currency and checkable deposits, they facilitate the purchase of goods and services. Suppose that Jonathan McJohnson heads off to Natural Ned's Nursery and Garden Center to purchase a lawn sprinkler, some fertilizer, and assorted shrubbery. Jonathan can make this purchase by laying down a handful of Federal Reserve notes and U.S. Treasury coins (currency) or by scribbling out a check for the amount of the purchase (checkable deposit). However, if Jonathan lacks access to these, he can whip out his plastic money (credit card) in the from of his OmniBank Platinum Diamond Express. Any one of the three allows the Jonathan to leave the nursery with his commodities. Credit cards, like currency and checkable deposits, function as a medium of exchange.


• Store of Value: But, credit cards do not function as a store of value. Credit cards are a liability. Liabilities cannot store value. Only assets can store value. To store value and function as money, a medium of exchange must also be an asset. This excludes credit cards from being money... plastic or otherwise. Jonathan's credit card purchase of lawn sprinkler, fertilizer, and assorted shrubbery creates a liability which is ultimately paid off with money... with currency or checkable deposit.

Asset for Asset

To answer this question, first consider a standard money purchase. If Jonathan McJohnson pays cash for his shrubbery purchase, then he trades one asset (currency) for another asset (shrubbery). Money purchases involve the exchange of one asset for another.

A credit card purchase does not work the same. A credit-card purchase only defers the ultimate exchange of asset for asset by creating a liability. The buyer receives an asset and the seller receives the promise of receiving an asset at a later time.

If Jonathan buys his shrubbery with his OmniBank Platinum Diamond Express credit card, then he trades a liability (credit card) for an asset (shrubbery). Jonathan does not give up an asset, at least not right away, but he does incur a liability, the balance on his OmniBank Platinum Diamond Express credit card.

A credit card purchase works like this. Jonathan receives his shrubbery--an asset. In exchange, Natural Ned's receives the promise of future payment--a liability. This liability is likely transferred to the credit card issuing company, OmniBank, when they process the transaction by sending Natural Ned's the money for the purchase and increasing the balance on Jonathan's OmniBank Platinum Diamond Express credit card.

But a liability remains. Jonathan has traded a liability for an asset. This transaction is completed only when Jonathan gives up an asset, that is, once he pays off the balance on his OmniBank Platinum Diamond Express credit card. This payment is accomplished by sending the OmniBank some money, either currency or a check.

The credit card purchase has only deferred the eventual asset for asset exchange. Ultimately, Jonathan exchanges an asset (money) for another asset (shrubbery).

A Word about Debit Cards

But unlike credit cards, debit cards really do qualify as "plastic money." Debit cards, like paper checks, access funds from a checking account. A debit card is processed by decreasing an asset, the checking account balance, just like writing a check. A credit card is processed by increasing a liability, the credit card loan balance.