Monday, August 11, 2008

Column #13 The Credit Card Swipe

(Week 3 - Monday Aug. 11)

In Column #3, "Where Does Our Money Come From?", I made the statement that ". . . virtually every citizen of the country has had a direct personal experience of the process by which our money comes into being. Indeed, many of us participate in one or more of its various forms almost daily, and yet remain completely unconscious of what we are actually doing. The process I am talking about is the deceptively simple act of borrowing money from a bank."

This statement begs the question, what form of borrowing money from a bank is so common that many of us participate in it almost daily, and yet remain completely unconscious of what we are doing? It is the act of using a credit card to buy something, or to get cash.

To illustrate, I would invite the reader to imagine a person in a clothing store taking a garment they wish to purchase to the cashier's counter. Let us suppose further that they are using a credit card to pay for the item. The customer will get out the card and swipe it through a register. If the card is accepted, the price of the item (let us say $50) will appear on a monitor. A machine connected to the register will print out a small slip of paper that lists the terms of the purchase. Typically, the customer will sign it, and then go off about his or her business without taking much thought about what has just transpired.

The critical point to take note of here is that the customer has entered into a loan contract with a bank (which is why there are always bank logos on credit cards). This means that the $50 dollars that were used to purchase the garment did not exist the moment before the card was passed through the machine. More precisely, the dollars were not "borrowed," but rather created with the swipe of the card and the pre-programmed electronic process by which the card was quickly approved. Now the $50 does exist (in the retailer's bank account), and the signing of the "receipt" by the customer is essentially the signing of a contract with the bank to whom he or she promises to "pay back" the $50, with "interest" if full payment is not received within a month.

This credit card purchase is one form of the basic bank loan transaction by which our money is created and put into circulation, just as surely as if one had walked into a banker's office to make the application. If the card is used to get cash from an ATM, the transaction is still a bank loan, except the money goes into the pocket of the cardholder instead of the account of a retailer. Technically, there will generally be a middleman involved in the form of the credit card company, and they will charge a fee for each transaction, but this does not change the fact that new money is created every time the card is taken out and used to access purchasing power (It should be noted that this does not apply to debit cards, or credit cards from institutions of deposit (e.g. credit unions) which operate under rules that prohibit them from creating money).

I would pose the query to each of us, "How many times have we gone through the motions of making a credit-card-purchase and not been mindful of the fact that we, along with the bank, were causing new money to be created at the point of transaction?" The answer to this question will give us an indication of the level of consciousness we bring to what we do with money. It will also, in my experience, provide insights into why our financial lives seem to have gotten so out of our control.

In tomorrow's column we will pick up the thread of this thought to see where it leads.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.