Are Credit Cards or Debit Cards Money? (ECO 202 WK3)

ECO 202 WK3 CASE
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Money can be defined as anything that is regularly used as a means of exchange (buying and selling of good and services). Mishkin (2007) defines money as any verifiable record or item acceptable as repayment for debts and payment for goods and services in a particular socio-economic context or country. Money can be in form of gold bars, precious stones and metals, and even currency in deposit and checking accounts. According to Dobeck and Elliott (2007), money provides an alternative form of exchange to barter trade since it’s a convenient substitute for physical goods.
This leads to the question: are credit cards and debit cards money? The answer is no. Debit cards represent a person's deposits in a bank account thus can be used as a tool to represent money but not as money itself. Credit cards represent the user's promise to pay for an item. Sexton (2012) describes a credit card a convenient tool for carrying out transactions that minimize the physical transfer of currency. He also describes a debit card as a card that lets a user access cash in their bank accounts, but the card is not money.
Banks act as financial intermediaries between the consumers and the federal reserve system (Central Bank). Banks earn their profits through the difference of the interests got from loans and the interests paid for deposits. Banks create money. One bank issues a loan that becomes the deposit of another. Money supply expands when the banks issue loans by an amount that is a multiple of a number of loans. The law requires banks to hold a fraction of deposits as a reserve of their money. This can be stored as deposits in the federal reserve or vaults.
During the money creation process, currency and checking accounts are included in the supply of money. A customer depositing in a bank decreases the amount of currency in circulation but increases checking deposits held by the banks. Reserve ratio is the ratio of bank reserves to deposits. To relate the total reserves in checking balances to that of the initial deposit, a deposit creation formula is used.
The total increase in checking account balance in all banks= initial cash deposit x (1/reserve ratio).
This formula helps to answer the following question. Assume that the bank holds no excess reserves and that the required reserve ratio equals 10% of deposits. If a customer deposits $5,000, what would be the total increase in checking account balances throughout all banks.
Since the reserve ratio is 10% of deposits:- 10/100 x $5,000= $500. $500 is the reserve ratio.
Thus the Total increase in checking account balance in all banks:- $5,000 x (1/$500)=$50.
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