In a 100% Gold Backed Currency, would credit cards still exist? No fiat, no credit?
What's the (supposed) relationship?
μὴ παραχώρει τοῖς κακοῖς ἀλλ' εὐτολμώτερον ἀντιβάδιζε.
If you pay for something by credit card, then what happens is that the bank (or whoever is the issuer of the credit card) deposits cash into the merchant's bank account, and at the same time increases the amount that you owe on your credit card.At first glance, credit cards appear to confer conflicting claims to money, just like demand deposits in fractional reserve banks. If everyone used their credit card right up to its limit on the same day, then it is unlikely that the banks could meet the demand. Where would they get that much gold to pay the merchants?One way would be for each bank to keep a separate gold reserve for each credit card holder up to his credit limit. But then, where would the bank have got the gold from? If it got it from time-deposits, then it can't afford to keep it in the vaults just so that someone can use his credit card whenever he feels like it. It could do so by charging the holder interest on his undrawn balance, but who would want a credit card like that? It would no longer then be a credit card, but a debit card linked to a loan account incurring interest on its undrawn balance.Fortunately that is not necessary. A credit card does not confer a claim to money, but a conditional right to BORROW money on demand. It is conditional on availability of funds. There is therefore no conflict between multiple claims. A bank need merely invest some of its time-deposits in liquid investments sufficient to meet the totality of expected credit card claims. When the credit card is used, the bank sells some of those investments in order to pay the merchant, and debits the customer's credit card balance. In accounting terms, it does this: debit investment asset credit cash on hand (proceeds of sale)and then: debit cash on hand (to pay merchant) credit loan assetIn the unlikely event that everyone uses his credit card at the same time, the bank might have to dig into its capital to meet the demand. If that is not enough, then it might have to borrow from other banks. And if it still cannot raise the required funds, then the credit card transaction would be denied. Not with the message "credit limit exceeded" but with the message "funds exhausted".What is more likely is that the bank will allow the transaction, by obtaining funds at a higher interest rate, possibly at a loss. Then next month it will recoup its loss by raising interest rates on credit card balances across the board. Even today, however, I believe that the bank has the right to deny transactions on credit cards, if the need arises.So - yes, credit cards are consistent with 100% gold-reserve banking. It would be simpler if everyone used a debit card instead, but credit cards will flourish as long as merchants persist in paying customers' short term interest costs for them.
ViennaSausage: In a 100% Gold Backed Currency, would credit cards still exist? No fiat, no credit?
Assuming 100% commodity currency and 100% reserve banking. For purposes of example, we will assume gold is the currency.
My thinking is that credit cards as we know them would NOT exist. In 100% reserve banking, credit will be at a premium, since it could not be artificially created. It could only exist to the level of actual savings. Since credit would be scarce, it MUST be tightly and strictly managed. Unsecured, revolving credit is NOT the best allocation of scarce credit. Instead, most credit would likely go in the secured direction, such as mortgages, business loans and car payments. Certainly elite individuals might possess lines of unsecured credit, but likely at a VERY expensive premium. For most of us, credit cards would be a memory.
I am afraid folks would actually have to SAVE to get the things they want. PERISH THE THOUGHT. :) Seriously though, the days of instant gratification via credit cards would be over and rightly so.
Mark B.:I am afraid folks would actually have to SAVE to get the things they want.
The whole economy would change without unsecured credit. Perhaps for the better in the sense of personal responsibility, but perhaps worse, in the sense of instant gratification.
Mark B.:Unsecured, revolving credit is NOT the best allocation of scarce credit. Instead, most credit would likely go in the secured direction, such as mortgages, business loans and car payments.
The market will decide the best allocation of scarce credit. And there will be credit in abundance - at the right price.Current credit cards already charge an inordinate amount of interest - both to the merchant who pays the initial charge-fee, and to any consumer imprudent or desperate enough not to pay off his balance within the interest-free period. Yet they are still popular.Unsecured credit is expensive. But to many consumers it is preferable to no credit at all. Living without a fridge, or a washing machine, can be unpleasant. To anyone who gets a job when their savings are low, a credit card can be a godsend.
Perhaps the name - credit card is what is throwing everyone off base? I tend to use this moe (media of exchange) like one would a check or debit transaction. Currently having a grace period (25 days?) to pay does put this use into a short term loan status, but seeing how the agreement is that if paid in full, then no interest is charged. Great loan rate (0%) don't you think?
I can't see why these wouldn't exist in a gold based economy, but I bet there would be a minimum 'accounting/handling' fee put onto this use. Isn't this rather like asking if there will be LOANS in a gold based money system? I'd bet that the main reason credit cards as we now know them exist is due to the high interest charged and PAID by those who do NOT pay the total debt each month.
Mark B.: In 100% reserve banking, credit will be at a premium, since it could not be artificially created. It could only exist to the level of actual savings. Since credit would be scarce...
In 100% reserve banking, credit will be at a premium, since it could not be artificially created. It could only exist to the level of actual savings. Since credit would be scarce...
Why do you think so? Most businesses, except for retail sales, operate on credit anyway - customers often have 30-50 days to pay. They'd have the same deal with credit card suppliers, so they really don't have to pay over any money before the customer pays off his CC (except for idiots who don't pay it off each month; and they already get charged a ridiculous rate of interest)
Mark B.: Certainly elite individuals might possess lines of unsecured credit, but likely at a VERY expensive premium.
Certainly elite individuals might possess lines of unsecured credit, but likely at a VERY expensive premium.
You mean, like, credit-card level interest rates?
Jain Daugh: but I bet there would be a minimum 'accounting/handling' fee put onto this use.
but I bet there would be a minimum 'accounting/handling' fee put onto this use.
They already charge a fee - they just charge it to the merchant, not you, and they don't allow him to charge you the difference.
Credit would be common, but it would be different. Today if I want to buy something on credit from Walmart I get Visa to pay Walmart up front and I'll pay Visa back in installments.
Without an easy credit environment the risk would not be externalized. I would pay the installments directly to Walmart, who would not be compensated upfront.
It is not required for $10 worth of liquid assets to exist some where for me to buy a $10 item on credit.
Yes, credit would still exist.