Question

Use the three functions of money to explain why credit cards are not a part of the money supply. Answer in your own words.

Answer 1

Credit cards are convenient means of obtaining a short-term loan from the financial institution that issued the card. You pay this loan back during monthly payments from your checking accounts; credit cards only defer or postpone the payment for a short period. If you count credit card purchases, then you'd be double counting because you'd count the credit card purchase at the time as, then at the end of the month, you'd count that purchase again when you reimburse the financial institution with your checking account.

"1) money serves as a medium of exchange. "
"2) The second function money needs to serve is as a unit of account"
"3) The third function that money needs to serve is as a store of value"

Actually, when you buy something with a credit card, you’re not spending money. The principle of the credit card is buy-now-pay-later. In other words, when you use plastic, you’re taking out a loan that you intend to pay off when you get your bill. And the loan itself is not money. Why not? Basically because the credit card company can’t use the asset to buy anything. The loan is merely a promise of repayment. The asset doesn’t become money until the bill is paid (with interest). That’s why credit cards aren’t included in the calculation of M-1 and M-2.

A credit card can serve as a medium of exchange because it is accepted in exchange for goods and services. A credit card is, arguably, a (negative) store of value because you can accumulate debt with it.

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.