Are Credit Cards A Medium Of Exchange?
To answer the question, if a credit card is considered to be a medium of exchange is complicated. Before we answer that question, we first need to truly understand what a medium of exchange is.
The definition of medium of exchange states that it is an element of standardized value used to settle the exchange of any given item. Basically, this means that it is an instrument that facilitates the trade of goods and services.
While this definition does help, it does not clarify our answer as much as we might like, so, let’s look more into this and properly explain this for you.
What Is A Medium Of Exchange?
The best example of what a medium of exchange is, is currency and the whole purpose of currency, its purpose being the facilitation of trading activities.
By providing a known element with a collectively-agreed upon value of exchange, the medium of exchange then becomes a generally accepted way to settle any economic transaction. Modern economic dynamics are only possible in society due to the use of currency as a medium of exchange.
Dollars are therefore a medium of exchange. Without a medium of exchange, it would therefore be impossible to settle as many trade operations quickly. Standardized currency is the reason that our society can act and behave so quickly.
The main requirement for an instrument to become a generally accepted medium of exchange is intrinsic and collective agreement upon its reliability and value. So, money is a medium of exchange… basically.
In some ways, cryptocurrency could be seen as a medium of exchange as well, although one that is less reliable than, say, dollars, due to its value fluctuations.
A medium of exchange needs to have reliable valuation, and it must also be easily interchangeable. In Addition to currencies, barter is also a medium of exchange.
In barters, each item is a medium of exchange, and there is an individual and subjective valuation process in the mind of each party who partakes.
What Is A Credit Card?
So we know and understand what a medium of exchange is, so what is a credit card, then? Well, a credit card is a type of loan in which the money you spend is borrowed from the card provider rather than taken out of your bank account.
It is a card that allows you to borrow money to pay for goods and services with the promise that you will repay the provider of the card what you owe at a future date with interest added.
Unlike other loans, a credit card is a revolving line of credit, so you can continually borrow and pay back on a rotating basis.
Money As A Medium Of Exchange
Money is a medium of exchange, let’s clarify this. Money enables us to participate as equal market players. When consumers use money to purchase an item or service, they effectively make a bid in response to an asking price.
This interaction creates order and predictability in the market. Producers know what people want and also know how much to charge people for their item, while consumers can reliably plan their budgets around these stable prices.
If money were no longer a viable medium of exchange, or if the monetary units could no longer be accurately valued, consumers would lose their ability to plan budgets, and therefore there would be no way to gauge supply and demand.
This would cause the fall of the market, and the volatility of the markets would become utter chaos.
If we understand money as a medium of exchange, then we understand that it is the value of the money itself that is this, and not how the money is presented.
Therefore, money, be it on a card, in cash, or online is always a medium of exchange, this means that your wallet, bank account, PayPal account, and credit cards are not a medium of exchange.
You could argue that a loan is a medium of exchange, in that any loan is basically paying money to receive money, however, even in this instance, money is still the medium of exchange and not the loan itself.
How Do Credit And Debit Cards Fit Into All This?
So, understand that credit cards, and in fact any card with money on it is not in fact a medium of exchange, let’s look into how these cards actually work as part of the monetary system in the world that we live in.
Many people, if not most, will use credit or debit cards to make purchases. As money is a medium of exchange, you might wonder how exactly these cards we use so often fit into the measurement and analysis of money in our society.
Starting off with credit cards, you might think that credit cards are part of the economy’s stock of money, whereas in fact, measures of quantity of money do not take credit cards into account at all.
They are not really even a method of payment, in fact, they are more like a method of deferring payment. So, if you buy a new jacket with a credit card, then the bank who issued the card actually pays the store what is owed, and later you repay the bank.
When it comes to the time when you have to repay your credit card bill, you will do so by writing a check against your account and the balance in this account is what is part of the economy’s stock of money.
Debit cards are different, as they automatically withdraw funds from a bank account to pay for items that are bought.
Even though credit cards are not actually a form of money, they are still important for analyzing the monetary system.
As people with credit cards can pay many of their bills at once at the end of a month, instead of sporadically, they may hold less money on average than people who do not own credit cards.
So, they are not a medium of exchange, but they are a significant aspect of analyzing the monetary system in our societies.